How to Calculate Loan Repayments and Monthly Interest

Whether you are looking to purchase a car, remodel your home, or cover unexpected personal expenses, taking out a personal loan requires careful planning. The most important metric to analyze is the monthly repayment, which determines how borrowing fits into your monthly household budget.

The Monthly Repayment Formula

Standard fixed-rate amortizing loans use a financial equation to spread payments evenly across the term. The formula incorporates the principal, the nominal interest rate, and the total number of monthly payments.

The formula is:

M = [P × (r / 12)] / [1 - (1 + r / 12)^(-n)]

Where:

• M: Monthly payment amount.
• P: Principal (loan amount).
• r: Annual interest rate (in decimal format, e.g., 0.05 for 5%).
• n: Total number of monthly payments.

Understanding Amortization

Each monthly payment is divided into two distinct components:

• Interest Paid: The cost charged by the lender, calculated monthly against the remaining principal balance. Early in the loan term, interest represents a larger share of your monthly payment.
• Principal Repaid: The portion of the payment that actually reduces your outstanding loan balance. This share grows larger with each passing month.

Calculating the Total Cost of the Loan

The total cost of borrowing represents all interest payments accumulated across the life of the loan:

Total Cost = (Monthly Payment × n) - Principal

Calculation Example:

If you borrow $15,000 for 36 months at a 5% interest rate:

• The calculated monthly payment is $449.56.
• The total amount repaid over 3 years is $449.56 × 36 = $16,184.16.
• The net cost of the loan (interest) is $1,184.16.

To estimate monthly payments for different loan sizes, terms, and interest rates instantly, try our interactive online Loan Repayment Calculator.