How to calculate loan payments
Before you borrow, it pays to know what the loan will really cost. The monthly payment is only part of the story; the total interest over the full term is what shows the true price.
What you need to know
- The amount you want to borrow.
- The yearly interest rate offered.
- The length of the loan.
Enter these into the Loan Calculator and it shows your monthly payment, the total interest, and the total you will pay back.
Compare different options
Try the same loan over a shorter and a longer term. A longer term lowers the monthly payment but usually adds a lot of interest. A small change in rate has a bigger effect on large, long loans, so even a quarter of a percent can matter.
For a home purchase, use the Mortgage Calculator, which is set up for that kind of loan.
Remember what the estimate leaves out
The results are estimates based on a fixed rate. Fees, insurance, taxes and variable rates will change what you actually pay, so confirm the exact figures with your lender. To see how savings grow instead, try the Compound Interest Calculator.
A worked example
Take a 20,000 loan at 6 percent. Over 5 years the payment is about 387 a month and you repay about 23,200 in total, so roughly 3,200 is interest. Over 3 years the payment rises to about 608 a month, but total interest falls to about 1,900. Over 7 years the payment drops to about 292 a month, while interest climbs to about 4,500.
The pattern is the same for every loan: a longer term makes each payment smaller and the whole loan more expensive.
What paying extra does
In the 5-year example, adding 50 to each monthly payment clears the loan in about 52 months instead of 60, and saves roughly 400 in interest. Extra money reduces the balance sooner, and interest is charged on the balance, so the saving grows the earlier you start. Confirm with your lender that early payments are allowed without a penalty.
Interest rate versus APR
The interest rate is the cost of the money itself. The annual percentage rate, or APR, also includes certain fees, so it is the better number for comparing offers. A loan with a slightly lower rate but high fees can cost more than one with a slightly higher rate and no fees, so compare the APR and ask for the total cost.
Questions to ask your lender
- Is the rate fixed or variable, and how often can it change?
- Are there set-up fees, annual fees or insurance that I must pay?
- Is there a penalty for paying early or paying extra?
- What is the total amount I will repay over the whole term?
Frequently asked questions
Is this financial advice?
No. It is a calculator that gives estimates. Speak with a qualified adviser or your lender before making a decision.
Why is my real payment different?
Lenders may add fees, use a variable rate or round differently, so the exact payment can vary slightly.
Does paying extra help?
Usually yes. Extra payments reduce the balance sooner, which cuts the interest you pay. Check your lender allows it without a penalty.
How is the monthly payment worked out?
From the amount borrowed, the interest rate and the number of payments. Early payments are mostly interest, and later payments are mostly principal.
Is a shorter loan always better?
It costs less in interest, but the monthly payment is higher. Choose the shortest term you can afford comfortably.
Does the calculator include fees?
No. It covers the principal and the interest rate you enter. Add known fees separately, or ask the lender for the APR.