How the Loan Payment Formula Works
Lenders calculate fixed monthly installment payments using standard amortization formulas. To compute your monthly repayment manually, use the equation below:
M = P × [ r(1 + r)ⁿ ] / [ (1 + r)ⁿ – 1 ]
P = PrincipalThe total money borrowed (e.g. $25,000).
r = Monthly RateAnnual interest rate divided by 12 months (e.g. 6.5% / 12 = 0.005417).
n = Total MonthsNumber of loan repayment years multiplied by 12 (e.g. 5 yrs = 60 months).
Step-by-Step Calculation Example
Suppose you borrow $20,000 at an annual interest rate of 6% for a term of 5 years (60 months):
- Convert rate: Monthly rate = 6% / 100 / 12 =
0.005. - Calculate factor: (1 + 0.005)⁶⁰ ≈
1.34885. - Compute monthly payment: 20,000 × [0.005 × 1.34885] / [1.34885 – 1] = $386.66 per month.
- Total amount repaid: 60 × $386.66 = $23,199.60.
- Total interest paid: $23,199.60 – $20,000 = $3,199.60.
Frequently Asked Questions
Common questions and detailed answers regarding calculations and formulas.
Monthly payments are calculated using the standard amortization formula: M = P [ r(1 + r)^n ] / [ (1 + r)^n – 1 ], where P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12 months), and n is the total number of monthly payments (years multiplied by 12).