Whether you’re taking out a mortgage, securing a personal loan or buying a new car, it’s important to know what your loan payments will look like so you can budget accordingly. Learning how to calculate your loan payments ahead of time can help you reduce the number of hard inquiries to your credit report so you can secure the best rates while shopping for the best loan product for your needs.
There are many different methods that can be used to calculate your loan payments, and our team has outlined each below to help you make the best decision when shopping for your next loan.
What is a loan payment calculation?
Loan payment calculations are the specific mathematical methods through which you can calculate your monthly loan payment. Typically, personal loans operate on an amortization schedule, meaning you make monthly payments toward principal and interest until the interest accumulating decreases to the point where your last few payments are mostly principal payments.
Sometimes, personal loans operate on a balloon payment schedule, meaning the borrower pays less than they normally would in monthly payments in exchange for paying off the remaining balance in a lump sum at the end of the term. Balloon payment loans are typically reserved for mortgages, but some personal loan providers offer them.
[ More: How Much the Average American Pays in Interest ]
Depending on which loan type you have, you’ll use a specific equation and enter in your personal loan details to figure out how much your monthly obligation will be.
What do I need to know to calculate my loan payment?
In order to determine your monthly loan obligation — regardless of whether you have a balloon payment or amortizing loan — you’ll need to know the following information:
- Principal amount: The original loan amount that you borrow from the lender
- APR: The annual percentage rate, which is the interest rate and any fees. APR is the cost of borrowing and the rate at which the loan amount accumulates.
- Terms: The length of your loan, typically 12 to 60 months.
In addition to this information, you’ll also want to consider any fees that may be tacked on to your total loan obligation as this will impact your calculation results. For example, an origination fee of 1% tacked on to your 5-year, $20,000 personal loan means your 9% interest rate is really 9.426% APR.
Why should I calculate my monthly loan payment?
Calculating your loan payments prior to taking out a loan can help you in three major ways. By figuring out your loan obligation, you can avoid submitting applications for multiple loan products to find out what the monthly cost would be, thus protecting your credit score from being negatively impacted by multiple hard inquiries. Additionally, calculating your loan payments ahead of time can help you shop more realistically as you are better able to determine what you can afford to borrow.
Not only will these calculations help you shop realistically, but they can help you shop smarter as well: By understanding how APR and term lengths will ultimately impact your monthly obligation, you can ensure you secure the best deal for your loan.
Personal loan monthly payment formula
While calculating the monthly payment on amortizing loans, remember that some of your monthly payment is applied to your principal balance while the other portion goes towards interest.
Personal loans are a common example of amortizing loans. To calculate your monthly personal loan payment, you can do one of two things: use Excel, Google Sheets or a similar spreadsheet program to calculate it or use a personal loan monthly payment formula to calculate it yourself.
[ Next: What Is a Personal Loan? ]
DIY personal loan monthly payment formula
Let’s say you take out a $20,000 personal loan with a five-year loan term and 9% APR. The formula to calculate your monthly payments is:
Monthly Payment = ( Principal Amount x [ Rate ] ) / [ 1 – (1 + Rate)^( -n) ]
Where rate is the APR expressed as a decimal and divided by the number of payments per year (12) and n is the total number of payments made over the life of the loan (12 x term length)
With this information and the example above, you can calculate the monthly personal loan payments as:
Monthly Payment = ( $20,000 x [0.09/12] ) / [ 1 – ( 1 + [0.09/12] )^( – [12 x 5]) ]
Monthly Payment = ( $20,000 x 0.0075 ) / [ 1 – (1 + 0.0075)^(-60) ]
Monthly Payment = ($150) / ( 1 – 0.63869 )
Monthly Payment = $415.155
Using spreadsheets to calculate monthly payments
If you’re not a math whiz, calculating monthly payments with the formula above is probably difficult. Luckily, you can use Excel, Google Sheets or another spreadsheet program to calculate your personal loan monthly payment.
How to calculate personal loan monthly payments in Excel
- Open a blank sheet on Excel
- Navigate to the “Formulas” tab at the top, then click on any open cell on Excel and hit “Insert Function.”
- A tab will pop up on the side with a list of functions available. Find “PMT” and click “Insert Function” underneath.
- A list of fields will appear, wherein you can insert your numbers.
- Under “Rate,” insert the APR/12. For example, 9%/12
- In “Nper,” input the total number of payments for the life of the loan. From the example above, this number will be 60 (5 years multiplied by 12).
- In the “Pv” field, insert the principal loan amount. In the example, this number is $20,000.
- Hit “Done” and your monthly payment will be calculated in the cell.
How to calculate personal loan monthly payments in Google Sheets
- Open a blank sheet on Google Sheets
- On Google, you can click any open cell, then click the tab “Insert” > “Function” > “Financial” > “PMT”
- The open cell will then show “=PMT(__)” in the blank area between the parentheses, input the following: APR/12,Number of Payments, Principal Loan Amount. With the example above, this would be =PMT(9%/12,60,$20,000).
- Hit enter and the calculation will show up in the cell.
Remember, when calculating your personal loan monthly payment, the monthly payment does include interest. If you want to know how to calculate the interest payment for each month, you can use the following formula:
( APR / Payments Per Year ) x Principal Loan Amount = Interest Payments
For the example above, the interest monthly payment for the first month is:
( 0.09 / 12 ) x $20,000 = $150
This means that for the first monthly payment of a five-year, $20,000 personal loan at 9%, $150 of the $415.155 payment goes toward interest payments and the remaining $265.55 applies to the principal.
As you continue to make payments, less of your monthly payment will go toward interest. You can always use the formula outlined above to recalculate the interest obligation based on the updated, lower remaining loan balance.
How much does my loan cost?
While the monthly payment formula above might tell you how much you’ll pay per month, it doesn’t necessarily illustrate the total cost of your loan. In order to get the best deal on your loan, you’ll need to consider whether a lower interest rate or lower upfront fees are more worthwhile for your specific financial situation. Online calculators are available that can help provide a clearer image of what the total cost of your loan may be.
[ Read: How to Choose the Best Personal Loan for You ]
In addition to the monthly payment, you’ll want to zero in on which loan products provide the most affordable purchase price, lifetime interest and upfront fees. For some loan products, such as mortgage loans, the interest rate might even account for upfront fees like closing costs in addition to the rate on your total principal balance.
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