Loan Calculator

A loan calculator determines how much you'll pay monthly for a loan, how much interest you'll pay in total, and how your payments will be distributed between principal and interest over time. It's essential for making informed financial decisions about mortgages, auto loans, personal loans, and more.

Understanding the true costs of a loan helps you compare offers, budget appropriately, and potentially save thousands in interest.

Key Concepts

• Principal: Original loan amount
• Interest rate: Annual percentage charged for the loan (APR)
• Term: Duration of the loan (usually in months or years)
• Monthly payment: Fixed amount you pay each month
• Amortization: Process of gradually paying off the loan with regular payments

Types of Loans

• Mortgage: To buy property (15-30 years)
• Auto: For vehicles (typically 3-7 years)
• Personal: For various expenses (1-5 years)
• Student: For education (10-25 years)
• Business: For companies (varies widely)

Required Data

1. Loan amount (principal)

   • Example: $300,000 for mortgage

2. Annual interest rate

   • Example: 6.5% APR

3. Loan term

   • Example: 30 years (360 months)

4. Payment frequency (optional)

   • Generally monthly

Monthly Payment Formula

P = L × [r(1 + r)ⁿ] / [(1 + r)ⁿ - 1]

Where:

• P = Monthly payment
• L = Loan amount (principal)
• r = Monthly interest rate (annual rate ÷ 12)
• n = Total number of payments (years × 12)

How Payments are Distributed

In the early years, most of your monthly payment goes to interest. Over time, more goes to principal. This is called amortization.

Distribution example:

• Payment 1: $1,500 interest + $400 principal = $1,900 total
• Payment 180: $800 interest + $1,100 principal = $1,900 total
• Payment 360: $10 interest + $1,890 principal = $1,900 total

Situation: You want to buy a $400,000 house. You have $80,000 for a down payment (20%), so you need a $320,000 loan. The bank offers 6.25% annual interest for 30 years. How much will you pay monthly and in total?

Data:

• Loan amount (L): $320,000
• Annual rate: 6.25% = 0.0625
• Monthly rate (r): 0.0625 ÷ 12 = 0.00521
• Term: 30 years = 360 months (n)

Monthly payment calculation:

P = 320,000 × [0.00521(1.00521)³⁶⁰] / [(1.00521)³⁶⁰ - 1]

P = 320,000 × [0.00521 × 6.685] / [6.685 - 1]

P = 320,000 × [0.03483] / [5.685]

P = 320,000 × 0.006127

P = $1,960.64

Results:

1. Monthly payment: $1,961 (rounded)

2. Total payments in 30 years:

   • $1,961 × 360 months = $705,960

3. Total interest paid:

   • $705,960 - $320,000 = $385,960
   • You pay more in interest than the original loan amount!

4. Total cost of house:

   • Down payment: $80,000
   • Total paid: $705,960
   • Total cost: $785,960

1. Extra Payments to Principal

Additional $200/month payment:

• Reduces term from 30 to ~24 years
• Saves ~$85,000 in interest

2. Biweekly Payments

Instead of 12 monthly payments, 26 biweekly payments:

• Equals 13 monthly payments per year
• Reduces term approximately 5-7 years
• Saves thousands in interest

3. Refinance if Rates Drop

If rate drops to 5.25%:

• New monthly payment: ~$1,767
• Savings: $194/month = $2,328/year

4. Make Larger Down Payment

With 30% down payment ($120,000):

• Loan of only $280,000
• Monthly payment: ~$1,718
• Saves $243/month from the start

✅ Consider total payment, not just monthly: A longer term reduces monthly payments but dramatically increases total interest.

✅ 20% down payment avoids PMI: On mortgages, less than 20% requires mortgage insurance (PMI), adding $100-300 monthly.

✅ Calculate DTI (Debt-to-Income): Your monthly payment (including other debts) shouldn't exceed 36-43% of your gross monthly income.

✅ Compare offers from multiple lenders: Differences of 0.25-0.5% in rate can mean thousands in savings.

✅ Read the find print: Check for prepayment penalties, origination fees, and other hidden costs.

✅ Consider 15-year loans: Lower rate and less total interest, but higher monthly payments.

What's better: 15-year or 30-year term?

30 years: Lower monthly payments, more flexibility. 15 years: Lower rates, less total interest, faster equity building. Depends on your financial situation and goals.

How does my credit score affect the interest rate?

Significantly. Difference between excellent credit (750+) and fair (650): can be 1-2% in rate. On a $300K, 30-year loan, that's ~$200-400/month and $70K-140K in total.

Can I pay off my loan early?

Generally yes, but check for prepayment penalties. Some loans charge 1-2% of the balance for paying before a certain time.

What is APR vs. interest rate?

Interest rate: Just the cost of borrowing. APR: Includes rate + costs (points, origination fees, etc.). Always compare by APR, it's the true cost.

Are taxes and insurance included in monthly payment?

In mortgages, often yes in "PITI" payment: Principal, Interest, Taxes, Insurance. Ask if the quote includes only PI or full PITI.

Is refinancing worth it?

If you can reduce the rate by 0.75-1% or more, generally yes. Calculate: (Refinancing costs) ÷ (Monthly savings) = months to "break-even." If you plan to stay longer than that, refinance.