How This Calculation Works
This calculator uses the standard amortization formula to find your fixed monthly payment: it takes the loan principal, converts your annual interest rate into a monthly rate, and spreads the balance evenly across the number of monthly payments in the term — so each payment is the same size, but the mix of principal versus interest shifts over time.
Early in the loan, more of each payment goes toward interest because the outstanding balance is still large. As you pay down the principal, the interest portion shrinks and more of each payment chips away at the balance. This is why paying extra toward principal early in a loan saves disproportionately more interest than paying extra later.
The total interest shown is the difference between everything you'll pay over the life of the loan and the amount you originally borrowed — it's the true cost of borrowing, separate from the principal itself.
Common Mistakes to Avoid
- Comparing loans by monthly payment alone. A longer term lowers the monthly payment but almost always increases total interest paid. Always compare total cost, not just the monthly figure.
- Ignoring fees. Origination fees, application fees, and prepayment penalties aren't included in a basic payment calculation. Ask lenders for the APR, which bakes in most fees, for a fairer comparison.
- Assuming the advertised rate is your rate. Advertised rates usually apply to borrowers with excellent credit. Get a real quote based on your credit profile before budgeting around an estimate.
- Not checking for prepayment penalties. If you plan to pay off the loan early or refinance, confirm there's no penalty for doing so — some loans charge a fee for early payoff.
Worked Example
Scenario: A $20,000 loan at 6.5% annual interest over 5 years (60 months).
Step 1 — Monthly rate: 6.5% ÷ 12 = 0.5417% per month (0.005417 as a decimal).
Step 2 — Apply the amortization formula: M = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1], where P = $20,000, r = 0.005417, n = 60.
Step 3 — Result: Monthly payment ≈ $391.32.
Step 4 — Total cost: $391.32 × 60 = $23,479.20 total paid, meaning $3,479.20 in total interest over the life of the loan.