Finance · 1 min read
How to calculate loan payments
A fixed-rate loan has a level monthly payment. The formula needs only the amount, the rate and the number of months.
Last updated November 5, 2026
The formula
Monthly payment
payment = P × r ÷ (1 − (1 + r)^−n)
- P
- the amount borrowed
- r
- the monthly interest rate, the annual rate ÷ 12 as a decimal
- n
- the number of monthly payments
Worked example
Worked example
Borrow 20,000 at 6% a year for 60 months
| Step | Calculation | Value |
|---|---|---|
| Monthly rate r | 0.06 ÷ 12 | 0.005 |
| Payments n | 5 years × 12 | 60 |
| (1 + r)^−n | 1.005^−60 | about 0.7414 |
| Denominator | 1 − 0.7414 | 0.2586 |
Result: 20,000 × 0.005 ÷ 0.2586 ≈ 386.66 a month
Over 60 months you pay about 23,199 in total, so the interest is about 3,199.
A shorter term costs less interest
Worked example
The same loan over two terms
| Term | Monthly payment | Total paid | Interest |
|---|---|---|---|
| 60 months | 386.66 | about 23,199 | about 3,199 |
| 36 months | 608.44 | about 21,904 | about 1,904 |
The payment is higher with the shorter term, but you pay less overall.
What the formula leaves out
Important
- Fees, insurance and taxes are not part of the payment formula. Ask the lender for the full cost.
- Rates quoted as APR can include fees, so two offers with the same rate may differ.
- Extra payments reduce the balance faster. An amortization schedule shows by how much.