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How to Calculate Loan Payments: Amortization Explained
Every loan payment — mortgage, car loan, personal loan — is built from the same amortization formula. Once you understand it, you can compare offers in seconds and see exactly what a lower rate or shorter term saves you.
The amortization formula
A fixed-rate loan payment is M = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), where P is the principal, r is the monthly interest rate (annual rate ÷ 12), and n is the number of monthly payments. The formula spreads the loan so every payment is equal, but the mix of interest and principal inside each payment changes over time.
Early payments are mostly interest; later payments are mostly principal. On a 30-year mortgage, more than half of your first payment typically goes to interest — which is why extra payments early in the term save the most.
A worked example
Borrow $20,000 for 5 years at 8% APR. The monthly rate is 0.08 ÷ 12 = 0.00667 and n = 60 payments. Plugging in: M = 20,000 × 0.00667 × (1.00667)⁶⁰ ÷ ((1.00667)⁶⁰ − 1) ≈ $405.53 per month. Over 60 payments you pay $24,331.80 — so $4,331.80 is pure interest.
The Loan Calculator does this instantly and also shows total interest. Try the same loan at 6%: the payment drops to about $386.66 and total interest to $3,199.36 — a 2-point rate cut saves over $1,100.
How the term changes everything
Stretching a loan lowers the monthly payment but raises the total cost. A $300,000 mortgage at 6.5% costs about $1,896 per month over 30 years — $382,633 in interest. The same loan over 15 years costs about $2,613 per month but only $170,377 in interest. You pay 37% more per month to save 55% of the interest.
When comparing offers, always look at both numbers: the monthly payment you can afford and the total interest you will pay. The Mortgage Calculator shows both side by side.
Common mistakes to avoid
Do not compare loans on the monthly payment alone — a longer term always makes a payment look cheaper while costing more overall. Do not forget that car loans and mortgages may add fees, taxes and insurance that are not in the payment formula. And check whether the rate is fixed or variable: variable rates can raise your payment later.
For cars, negotiate the vehicle price before discussing financing, and run the numbers in the Car Loan Calculator with the actual APR from the lender — not the advertised “from” rate.