How to Calculate a Loan Payment

The lowest monthly loan payment is not always the cheapest loan. A longer term can make the payment easier to handle while increasing the amount of interest you pay over time.

The three main inputs

• Principal: the amount you borrow after down payment, trade-in, or fees that are rolled into the loan.
• Interest rate: the rate used to calculate interest on the outstanding balance.
• Loan term: the number of months or years you agree to repay the loan.

The Loan Calculator lets you test those inputs quickly. For vehicles, the Auto Loan Calculator adds down payment, trade-in, and sales tax assumptions.

The payment formula in plain English

For many fixed installment loans, the payment is calculated so that the same amount is due each month and the loan is fully paid off by the end of the term. The standard formula is:

M = P x r(1 + r)^n / ((1 + r)^n - 1)

In that formula, M is the monthly payment, P is the loan principal, r is the monthly interest rate, and n is the number of monthly payments. You do not need to calculate it by hand every time, but understanding the inputs helps you spot tradeoffs.

Why term length changes the total cost

A longer term spreads repayment across more months. That can lower the monthly payment, but interest has more time to build. A shorter term usually raises the monthly payment, but can lower total interest if the rate and fees are similar.

Before choosing a loan, compare both the monthly payment and total interest. The Compound Interest Calculator can also help you understand how rate and time interact.

APR is not the same as interest rate

The interest rate tells you how interest is calculated. APR is broader and may include certain loan costs. When comparing offers, check both numbers and read what fees are included so you are comparing similar loans.

Helpful references

• CFPB: Interest rate vs APR
• CFPB: Auto loan key terms
• CFPB: What to know before shopping for an auto loan