How to Calculate a Monthly Loan Payment
The formula lenders use for car loans, personal loans and mortgages — worked by hand.
By Sunil Arora · Updated October 17, 2026
A fixed-rate loan is repaid in equal monthly payments. Each payment covers that month's interest first, and the rest reduces the balance — so early payments are mostly interest and later ones are mostly principal. This is called an amortizing loan, and one formula gives the payment.
The monthly payment formula
Where: M = monthly payment · P = amount borrowed · r = monthly interest rate (APR ÷ 12) · n = number of monthly payments
Worked example: a $20,000 car loan
- Amount borrowed (P): $20,000
- Interest rate: 9% a year, so r = 0.09 ÷ 12 = 0.0075
- Term: 5 years, so n = 60
- (1 + r)^n = 1.0075^60 = 1.5657
- Top of the fraction: 20,000 × 0.0075 × 1.5657 = 234.85
- Bottom of the fraction: 1.5657 − 1 = 0.5657
- M = 234.85 ÷ 0.5657 = $415.17 a month
Over 60 payments you pay $24,910.03 in total, so the interest cost is $4,910.03.
What changes your payment
The amount you borrow
| Amount | Payment (9%, 5 years) |
|---|---|
| $10,000 | $207.58 |
| $20,000 | $415.17 |
| $30,000 | $622.75 |
The interest rate
| APR | Payment ($20k, 5 years) | Total interest |
|---|---|---|
| 7% | $396.02 | $3,761 |
| 9% | $415.17 | $4,910 |
| 11% | $434.85 | $6,091 |
The term
A longer term lowers the payment but raises the total interest.
| Term | Payment ($20k, 9%) | Total interest |
|---|---|---|
| 3 years | $635.99 | $2,895.81 |
| 5 years | $415.17 | $4,910.03 |
| 7 years | $321.78 | $7,029.65 |
Run your own numbers
The loan calculator does this math for any amount, rate and term, with a full amortization schedule and extra-payment savings.
Open the loan calculator →Mortgages work the same way — plus extras
The principal-and-interest part of a mortgage uses this exact formula. Your full monthly housing payment also adds property tax, homeowners insurance, private mortgage insurance (PMI) if you put down less than 20%, and any HOA dues. The mortgage calculator includes all of them.
Ways to pay less interest
- Borrow less — a bigger down payment shrinks P.
- Shop the rate — compare the APR from several lenders; a better credit score usually earns a lower one.
- Pick the shortest term you can afford — fewer months of interest.
- Pay extra toward principal — any extra payment skips future interest. Check that your loan has no prepayment penalty.
Frequently asked questions
Does the payment change over the life of the loan?
Not for a fixed-rate loan. An adjustable-rate loan (such as an ARM mortgage) recalculates the payment when the rate resets.
What if I make extra payments?
On most US loans, extra principal shortens the loan rather than lowering the monthly payment. You keep paying the same amount and finish sooner, with less total interest.
Why is my lender's number slightly different?
Lenders may round each month's interest, use a different day count, or roll fees into the loan. The formula gets you within a few cents to dollars.