Solo Biz Soft Editorial Team Before you borrow, it helps to know what the monthly payment will be and how much interest you will pay overall. The maths is the same for car loans, personal loans and mortgages that have a fixed rate.
The formula
Payment = P × r ÷ (1 − (1 + r)^−n), where P is the amount borrowed, r is the yearly rate divided by 12 (as a decimal) and n is the total number of monthly payments.
Step by step
- Divide the yearly rate by 12 and write it as a decimal.
- Multiply the number of years by 12 to get n.
- Work out (1 + r)^−n.
- Subtract that from 1.
- Multiply P by r, then divide by the result of step 4.
Worked example
20,000 at 6.5% for 5 years: r = 0.065 ÷ 12 = 0.005417 and n = 60. The payment is about 391.32 a month, a total of 23,479, so the interest is 3,479.
Common mistakes
- Using the yearly rate as the monthly rate
- Forgetting arrangement fees and insurance
- Comparing loans by monthly payment only. Look at total cost too
Skip the maths: use our free loan calculator. Buying a home? Try the mortgage calculator.
Frequently asked questions
Does a longer term save money?
It lowers the monthly payment but you pay more interest overall.
What is amortisation?
Spreading a loan into equal payments, where early payments are mostly interest and later ones mostly repay the balance.
Is the APR the same as the interest rate?
No. APR includes some fees as well. Ask your lender.
More free tools: browse all our free calculators.
This article is general information and not financial advice.