Kreditrechner

How Loan Payments Are Calculated

The Loan Amortization Formula

Our loan calculator uses the standard amortization formula used by banks and lenders worldwide: Monthly Payment = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1], where P is the principal (loan amount), r is the monthly interest rate (annual rate ÷ 12), and n is the total number of monthly payments. This formula ensures that each payment covers both interest and a portion of the principal, with the loan fully paid off by the final payment.

What Is Loan Amortization?

Amortization is the process of spreading loan repayment over a fixed schedule of equal payments. In an amortized loan, the earliest payments are mostly interest because your outstanding balance is at its highest. As you repay principal each month, the interest portion shrinks and the principal portion grows. By the final months of a 5-year loan, nearly the entire payment is principal. This structure is why making extra payments early in the loan term saves the most interest — every dollar of extra principal repayment reduces future interest charges on that amount for the remaining life of the loan.

Loan Types This Calculator Supports

• Personal loans — Unsecured loans typically ranging from $1,000 to $50,000, offered by banks, credit unions, and online lenders. APR typically 6%–36% depending on credit score, income, and lender.
• Auto loans — Vehicle financing with terms typically from 36 to 84 months. Shorter terms mean higher monthly payments but less total interest. New car loan rates are generally lower than used car rates.
• Student loans — Federal Direct Loan rates for 2025–2026 are 6.53% for undergraduates and 9.08% for Graduate PLUS loans. This calculator can estimate repayment under the Standard 10-Year plan or any fixed repayment schedule.
• Home equity loans — Fixed-rate loans secured by your home equity. Typically carry lower interest rates than unsecured personal loans due to the collateral involved.
• Business loans — Term loans from banks or the SBA typically range from 3–10 years. The same amortization formula applies to standard fixed-rate business loans.

How Interest Rate Affects Total Loan Cost

Interest rate has an outsized effect on total loan cost. Consider a $20,000 personal loan over 5 years: at 8% APR, your monthly payment is $405 and total interest paid is $4,332. At 18% APR — typical for borrowers with fair credit — your monthly payment rises to $508 and total interest paid reaches $10,489. That is more than double the interest for the same loan amount and same term. Shopping for a better rate and improving your credit score before applying can save thousands of dollars.

APR vs. Interest Rate

The interest rate is the cost of borrowing the principal, expressed as an annual percentage. The Annual Percentage Rate (APR) includes the interest rate plus all lender fees — origination fees, closing costs, broker fees — expressed as a single annual rate. Always compare APR rather than the stated interest rate when evaluating loan offers, since APR reflects the true total cost of the loan. If a lender quotes a low interest rate but charges high origination fees, the APR will be significantly higher.

Strategies to Reduce Your Loan Cost

• Improve your credit score before applying: A difference of 100 points in your FICO score can translate to 2–4 percentage points lower APR. Pay down existing revolving debt below 30% utilization, pay all bills on time, and avoid opening new credit accounts in the months before your loan application.
• Choose the shortest term you can afford: A 36-month loan will have higher monthly payments than a 60-month loan, but total interest paid will be substantially lower. Use this calculator to compare the total cost across different terms.
• Make extra payments: Most fixed-rate installment loans allow you to pay extra principal at any time with no prepayment penalty. Even $50–$100 extra per month on a 5-year loan can reduce your payoff time by several months and save hundreds in interest.
• Compare multiple lenders: Rates vary significantly between banks, credit unions, and online lenders. Getting rate quotes from at least three lenders — including your current bank and a credit union if you belong to one — typically reveals meaningful differences. Most lenders allow you to check your rate with a soft credit inquiry that does not affect your credit score.
• Consider a secured loan: If you have assets (a vehicle, savings account, or home equity), a secured loan typically carries a significantly lower interest rate than an unsecured personal loan, because the lender has collateral to reduce their risk.