How installment loans work
Most personal loans, car loans and student loans are amortizing installment loans. You borrow a fixed amount, pay the same amount every month and the loan is fully repaid at the end of the term. Each payment contains interest on the outstanding balance plus a repayment of principal. At the start most of the payment is interest; towards the end almost all of it reduces the balance. Mortgages use exactly the same mechanism over a much longer term; for home loans see our mortgage calculator.
The payment formula
With loan amount L, monthly rate i and n monthly payments:
monthly payment = L × i ÷ (1 − (1 + i)⁻ⁿ)
total repaid = monthly payment × n
total interest = total repaid − L
Example: you borrow $15,000 for a car at an APR of 8.5% over 60 months. The monthly rate is 8.5% ÷ 12 ≈ 0.708%. The payment is about $307.75, you repay about $18,465 in total and the interest costs about $3,465.
APR versus effective annual rate
Lenders quote rates in different ways, and the difference changes the payment slightly:
- Nominal APR (US and UK style). The annual rate divided by 12 is the monthly rate. This is the default in the calculator and matches most US and UK loan offers.
- Effective annual rate (common in the EU). The monthly rate is chosen so that 12 months of compounding produce the stated yearly rate. A 8.5% effective rate corresponds to a monthly rate of about 0.682%, giving a slightly lower payment.
Note that a legally required APR in many countries also includes mandatory fees, so it can be higher than the plain interest rate. Compare loans on the APR the lender is required to publish.
Loan term and total cost
| Loan | APR | Term | Monthly payment | Total interest |
|---|---|---|---|---|
| $10,000 | 9% | 36 months | $318 | $1,448 |
| $10,000 | 9% | 60 months | $208 | $2,455 |
| $10,000 | 9% | 84 months | $161 | $3,514 |
A longer term lowers the monthly payment but raises the total interest considerably. Choose the shortest term whose payment you can comfortably afford, and keep an emergency buffer.
Tips before you borrow
- Check the total, not just the payment. Dealers and lenders often advertise a low monthly figure by stretching the term.
- Look for prepayment terms. Many loans let you repay early without a penalty, which saves interest. Ask before signing.
- Fees count. Origination or arrangement fees increase the real cost; include them when comparing offers.
- Credit score. Your rate depends strongly on your credit history. Getting quotes from a few lenders, ideally with soft credit checks, is worth the effort.
- Inflation. Fixed payments become a little lighter over time if wages rise. See the inflation calculator for a sense of scale.
Read more
Our blog shows the monthly payment on a $10,000 loan for different terms and rates, and explains what APR means and how fees change it. If you are comparing a loan with paying in cash from savings, also look at the interest your savings would earn: the compound interest calculator shows what that money could grow to.
Frequently asked questions
How is a monthly loan payment calculated?
With the annuity formula: payment = L × i ÷ (1 − (1 + i)^−n), where L is the loan amount, i the monthly rate and n the number of months. The calculator does this for you.
What is the monthly payment on a $20,000 loan at 7% for 5 years?
About $396 a month. Over 60 months you repay roughly $23,760, so the interest costs about $3,760.
Should I choose a longer or shorter term?
A shorter term costs less interest overall but has a higher monthly payment. A longer term is easier on your monthly budget but more expensive in total.
What if the interest rate is 0%?
Then the payment is simply the loan amount divided by the number of months, and you repay exactly what you borrowed. The calculator handles 0% correctly.
Does this work for credit cards?
Not really. Credit cards have no fixed term and the minimum payment changes with the balance. This calculator is meant for loans with a fixed rate and a fixed number of payments.
Last reviewed: 2026-10-06. Results are estimates for information only.