Accounting GnomeHow loan payments are calculated
Most consumer and business loans are amortizing — you pay the same amount each month, with each payment split between interest and principal. Early payments are mostly interest; later ones are mostly principal.
Monthly payment = P × i ÷ (1 − (1 + i)⁻ⁿ)
Where P = loan amount, i = monthly interest rate (annual ÷ 12), and n = total number of monthly payments.
The power of extra payments
Adding even a small amount to each payment goes straight to principal, which shrinks the balance faster and cuts the total interest you pay — often by thousands, and shortens the payoff time. Try the "extra monthly payment" field above to see the effect.
Total interest vs. total paid
- Total paid = your monthly payment × number of payments.
- Total interest = total paid − loan amount (the true cost of borrowing).
- A lower rate or shorter term both reduce total interest.