Understanding How to Figure Out Monthly Payments on a Loan
Knowing how to calculate monthly payments on a loan is among the smartest financial moves you can make before borrowing money. By calculating payments, you can effectively plan your budget, avoid costly surprises, and manage your debt responsibly.
Calculating monthly payments for a loan involves considering the amount you borrowed, the loan term, and your interest rate. In this article, our loan experts explain how to work out payments on a loan using an online calculator or a mathematical formula to stay on top of your finances.
What Factors Determine Your Monthly Loan Payment?
The first step to identify monthly payments on a loan is to understand the factors going into the calculation.
Here’s an overview of important terms to get started:
- Loan amount/principal – total amount you borrow
- Loan term – length of time (typically in years) you have to repay your loan
- Interest rate/APR – percentage of interest you pay to borrow money, either fixed or variable
- Payment frequency – typically monthly payments, but some loans allow biweekly payments to shorten your repayment period
- Extra fees – any origination fees, prepayment penalties, or other charges adding to your overall loan repayment
The Loan Payment Formula, Simplified
If you want to figure out how to calculate monthly loan repayments manually, you can use this amortization formula:
Here’s what those letters and numbers mean:
- M = monthly payment
- P = principal loan amount
- r = monthly interest rate (the annual rate divided by 12 months)
- n = total number of payments in months
Let’s look at an example to better understand how to calculate monthly loan repayments manually.
If you borrow $10,000 for 36 months at a 5% interest rate, you will convert that 5% annual rate to a monthly payment by dividing 0.05 by 12, which equals 0.004167. To factor in the 36 total payments, your formula would look like this, and the math shows your monthly payment is $299.71.
How to Use a Loan Payment Calculator
Although it’s excellent to understand the math behind an amortization formula, using an online loan payment calculator can make life easier and ensure accurate calculation results.
You can find free loan payment calculators online and use them by inputting your loan amount, term, and interest rate. Simply click the “calculate” button to instantly see your monthly payments, total interest owed, and overall loan cost.
Many online calculators allow you to try “what if” scenarios, such as lowering your interest rate or extending your term, to see how subtle changes might significantly affect your payments.
How Loan Terms Affect Your Payment
Loan terms have a significant impact on what you’ll be responsible for paying each month on your loan and how much you’ll owe during the total lifespan of your loan.
For example, a shorter term will mean higher monthly payments, but you’ll pay less interest overall. Meanwhile, a longer term means lower monthly payments, but you’ll pay more interest over time.
Let’s say you take out a three-year auto loan costing $325 per month. A five-year loan on that same vehicle could make your monthly payments drop to $200. However, it would also require you to pay more in total interest over those five years.
Strategies for Making Extra Payments
Armed with the knowledge of how to calculate monthly payments on a loan, you can now look into strategies to reduce your overall costs and live a financially responsible life.
Since most loans are amortized, early payments you make primarily go toward interest, and later payments go toward the principal. When you make additional payments, you can reduce your interest owed and shorten your loan term.
One strategy is to add a little extra to each monthly payment you make. You can also schedule one full extra payment per year during a period when you have more cash flow in your budget. Some people use their tax refunds or work bonuses to make an additional payment, or even a large lump-sum payment, to pay off the entire remaining balance of their loans.
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Ways to Lower Your Monthly Loan Payments
Additionally, there are other ways to reduce your monthly payments and increase your financial flexibility. Here are some examples:
- Make a sizeable down payment on your own
- Refinance your loan for a lower interest rate
- Extend your loan term to spread out the monthly payments
- Consolidate multiple loans into one at a reduced rate
- Look for income-driven repayment plans, especially for federal student loans
Common Types of Loans & Payment Examples
To help you understand the broader implications of borrowing money as you figure out monthly payments on a loan, here are some examples by loan type:
| Loan Type | Typical Term | Secured/Unsecured | Payment Range |
|---|---|---|---|
| Mortgage | 15–30 years | Secured (home) | Varies significantly |
| Auto Loan | 3–7 years | Secured (vehicle) | $300–$700/month |
| Student Loan | 10–25 years | Typically unsecured | $150–$500/month |
| Personal Loan | 1–5 years | Unsecured | $100–$500/month |
Frequently Asked Questions Related to How to Work Out Payments on a Loan
How do you calculate monthly payments on a loan? If you still have questions, below are answers to some of the most common concerns our customers have when they visit our Tower Loan offices.
We welcome you to call a local Tower Loan office near you or stop by during business hours to learn more about installment loans and how they work. Downloading the Tower Loan mobile app on your smartphone can also simplify applying for a new loan, checking your loan status, and managing payments from the palm of your hand.
Can I calculate credit card minimum payments with this method?
No, the calculation for credit card minimum payments uses a percentage-based formula. Standard formulas involve looking at the greater of a percentage or a flat amount, or a percentage plus interest and fees.
How does an adjustable-rate loan change my monthly payment?
With an adjustable-rate loan, your monthly payments may increase or decrease as the interest rate changes.
Should I always pay more than the minimum?
Yes, it is generally a good idea to pay more than the minimum required to lower your total interest owed and pay down your balance faster.