How Loan Payments Work (and How to Calculate Them)
Whether it's a mortgage, a car loan, or a personal loan, a fixed-rate loan has one reassuring feature: the monthly payment never changes. But what goes on inside that payment changes every single month.
The monthly payment formula
A fixed loan is amortized — engineered so that a constant payment pays it off exactly at the end of the term. The payment is:
M = P · r(1+r)^n / ((1+r)^n − 1)where P is the amount borrowed, r is the monthly interest rate (the annual rate ÷ 12), and n is the number of payments. You rarely need to do this by hand — the loan & mortgage calculator does it and shows the totals instantly.
Interest first, principal later
Each payment is split in two:
- Interest on the current balance.
- Principal, which is whatever is left of the payment.
Early on, the balance is large, so most of the payment is interest and only a sliver reduces the balance. As the balance falls, the interest portion shrinks and the principal portion grows. This is why, on a 30-year mortgage, you've paid off surprisingly little principal after the first few years.
The calculator's amortization table makes this visible — watch the interest column fall and the principal column rise year over year.
What drives the total cost
- Rate. Even a 1-point difference in the rate can change the total interest by tens of thousands over a long term.
- Term. A longer term lowers the monthly payment but raises the total interest, because the balance is outstanding for longer.
- Extra principal. Paying a little more than required goes straight to principal, shortening the loan and cutting total interest.
Try a few scenarios
- Enter your amount, rate, and term in the loan & mortgage calculator.
- Compare a 15-year vs. a 30-year term and note the total-interest difference.
- Curious how the lender earns it? The interest portion is just simple interest on the balance each month — see the simple interest calculator.
Knowing how the payment is built helps you shop for a better rate, pick the right term, and decide whether paying extra is worth it.
Keep reading
The Math Behind Loan Amortization (With a Worked Example)
Where the monthly payment formula comes from, why early instalments barely touch the principal, and what that means for paying a loan off early.
Compound vs. Simple Interest: What's the Difference?
Simple interest is charged on the original amount; compound interest is charged on the growing balance. The gap is huge over time.
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Why Your Regex Doesn't Match: The 7 Most Common Mistakes
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