How to Calculate Loan Payments: Principal, Interest, and Total Cost

Before you sign any loan, you should know three numbers: the monthly payment, the total interest, and the total cost. Lenders advertise the interest rate, but the monthly payment depends on the amount, the rate, and the term — and the total cost can be double what you borrowed. Here is how the math actually works.

The Loan Payment Formula

Most installment loans (car loans, personal loans, mortgages) use the same formula:

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

• M = monthly payment
• P = principal (amount borrowed)
• r = monthly interest rate (annual rate ÷ 12)
• n = number of payments (years × 12)

You do not need to memorize it — but understanding it helps: bigger principal, higher rate, or longer term all change the payment, and the term has a huge effect on total interest.

Worked Example: $10,000 at 6% for 3 Years

Item	Value
Principal	$10,000
Annual rate	6% (0.5% per month)
Term	36 months
Monthly payment	$304.22
Total paid	$10,951.92
Total interest	$951.92

Now stretch the same loan to 5 years: the payment drops to $193.33, but total interest rises to $1,599.60. Longer terms mean smaller payments and more interest — always compare total cost, not just the monthly figure.

Amortization: How Each Payment Is Split

Early payments are mostly interest; late payments are mostly principal. In month 1 of the example above, $50 goes to interest and $254.22 to principal. By month 36, only about $1.51 is interest. This is why paying extra early saves the most money — every early dollar avoids years of compound interest.

What to Watch For

• APR vs interest rate: APR includes fees, so it is the truer cost. Compare APRs, not headline rates.
• Origination fees: a 1% fee on a $10,000 loan is $100 of extra cost regardless of the rate.
• Prepayment penalties: if you plan to pay early, confirm there is no penalty or your savings vanish.

Before negotiating with a lender, run your own numbers: the Loan Calculator on todaycalculator.com computes the monthly payment and total interest for any amount, rate, and term — so you walk in knowing the exact figures.