How a loan payment is calculated
For a fixed-rate loan, the monthly payment is M = P × r ÷ (1 − (1 + r)−n), where P is the amount borrowed, r is the monthly rate (the yearly rate ÷ 12) and n is the number of monthly payments. With a 0% rate the payment is simply the amount divided by the number of months.
Example: a $10,000 loan at 5% for 5 years has a payment of $188.71 a month, and you pay $1,322.74 in interest.
Why the interest is front-loaded
Each payment first covers the interest that built up that month, and the rest reduces the balance. Early on the balance is large, so most of the payment is interest. Later, more goes to principal. The yearly table above shows the split.
Ways to pay less interest
- Choose a shorter term. Payments are higher, but total interest is much lower.
- Pay a little extra each month. Extra money goes straight to the balance.
- Compare rates. A one-point lower rate on a large loan can save thousands.
Figures are estimates for a fixed rate with equal monthly payments. Fees, insurance and variable rates are not included.
Quick examples
- $5,000 over 3 years
- $5,000 over 5 years
- $5,000 over 7 years
- $10,000 over 3 years
- $10,000 over 5 years
- $10,000 over 7 years
- $15,000 over 3 years
- $15,000 over 5 years
- $15,000 over 7 years
- $20,000 over 3 years
- $20,000 over 5 years
- $20,000 over 7 years
- $25,000 over 3 years
- $25,000 over 5 years
- $25,000 over 7 years
- $30,000 over 3 years
- $30,000 over 5 years
- $30,000 over 7 years
- $40,000 over 3 years
- $40,000 over 5 years
- $40,000 over 7 years
- $50,000 over 3 years
- $50,000 over 5 years
- $50,000 over 7 years
- $75,000 over 3 years
- $75,000 over 5 years
- $75,000 over 7 years
- $100,000 over 3 years
- $100,000 over 5 years
- $100,000 over 7 years