How a Loan Payment Is Calculated
By Tools Star Hub Editorial Team · Published · Updated
A standard loan payment spreads the principal and interest over a fixed number of months. On this calculator, $10,000 at 6% for 5 years, with no fee, has a monthly payment of $193.33, 60 payments, $1,599.68 of interest, and $11,599.68 paid in all. The first month is $50.00 of interest and $143.33 of principal, leaving $9,856.67. A $1,200 loan at 0% for 12 months is $100 a month and $0 interest. The fee is added to the total cost and is not financed into the payment.
The payment is not the rate times the balance once. Early months are mostly interest because the balance is still large. Later months apply more of the same payment to principal. Seeing the first month and the lifetime interest keeps a quoted payment from hiding the cost. This is the formula on the page. A lender can add fees or a different schedule.
What formula produces the payment?
When the annual rate is above 0, the monthly rate is the annual percent divided by 100 and then by 12. The payment is principal times that monthly rate times (1 plus the monthly rate) to the power of the number of months, divided by that same power minus 1. The page rounds the payment to cents. For $10,000 at 6% over 60 months, that payment is $193.33.
A 0% rate skips the interest formula. The payment is the principal divided by the number of months. $1,200 over 12 months is $100, the interest is $0, and the total paid is $1,200.
What happens in the first month?
Interest for the month is the balance times the monthly rate. On $10,000 at 6%, that is $50.00. The rest of the $193.33 payment, $143.33, reduces principal. The balance becomes $9,856.67. Next month’s interest is calculated on that new balance, so it is slightly smaller.
Over 60 months the interest adds to $1,599.68 and the total paid is $11,599.68. The schedule will not run if a payment fails to cover interest. The page says the balance would not fall.
How are the term and the fee treated?
The term is a whole number of years or months, at least 1. Years are multiplied by 12. The cap is 600 months, which the page describes as 50 years. The amount must be greater than 0, and the annual rate must be 100% or less.
An optional fee is added to the total cost after the payments are totaled. It is not added to the principal, so it does not change the $193.33 payment. A fee of 0 leaves the total cost equal to the total paid. The result is an estimate from these inputs, not a lender’s disclosure.
How a loan payment is calculated
- Enter the amount, annual rate, and term. Choose years or months. Five years is 60 payments. The term must be a whole number.
- Leave the fee at 0 unless you have one. A fee increases the total cost. It does not change the monthly payment.
- Read the payment, interest, and total paid. $10,000 at 6% for 5 years is $193.33 a month, $1,599.68 interest, and $11,599.68 paid.
- Read the first month if you want the split. The opening month of that example is $50.00 interest, $143.33 principal, and a balance of $9,856.67.
Example
$10,000 at 6% for 5 years
With a $0 fee, the payment is $193.33 for 60 months. Interest is $1,599.68 and the total paid is $11,599.68. Month 1 splits into $50.00 interest and $143.33 principal.
$1,200 at 0% for 12 months
The payment is $100, interest is $0, and the total paid is $1,200. The first month reduces the balance to $1,100.
Common mistakes
The fee is outside the payment
Adding a fee does not increase the financed principal on this page. Look at total cost including fee if you typed one.
The payment is an estimate of this formula
A lender may use a different day count, a fee financed into the loan, or a rate that changes. Those are not in this schedule.
FAQ
- What is the payment on $10,000 at 6% for 5 years?
- $193.33 a month for 60 months. Interest is $1,599.68 and the total paid is $11,599.68 when the fee is $0.
- How does the first month split?
- $50.00 is interest and $143.33 is principal. The balance left is $9,856.67.
- What is a $1,200 loan at 0% for 12 months?
- $100 a month, $0 interest, and $1,200 paid in total.
- Does the fee change the monthly payment?
- No. The fee is added to the total cost. It is not financed into the payment.
- How long can the term be?
- Up to 600 months, which is 50 years. The term must be a whole number of at least 1, in years or months.
To estimate a fixed installment payment, use the Loan Calculator. The fee is kept out of the monthly payment.
A home loan adds taxes and insurance on top. See How a mortgage payment is estimated.
A car purchase uses the same style of payment. See How to estimate a car loan payment.