Understanding loan costs
The table below illustrates how total interest paid varies with rate and term for a $20,000 loan — a common reference for auto and personal loan analysis.
| Rate | Term (months) | Monthly payment | Total interest |
|---|---|---|---|
| 5% | 36 | $599 | $1,580 |
| 5% | 60 | $377 | $2,645 |
| 7.5% | 36 | $622 | $2,395 |
| 7.5% | 60 | $401 | $4,061 |
| 10% | 60 | $425 | $5,496 |
| 15% | 60 | $476 | $8,547 |
- Longer loan terms reduce the monthly payment but increase total interest paid substantially. The difference in total interest between a 36-month and a 60-month term can exceed the monthly payment savings accumulated over the shorter period.
- This calculator does not include loan origination fees, prepayment penalties, or other charges that affect the true cost of borrowing. The APR (Annual Percentage Rate) disclosed by lenders incorporates these costs and is a more complete cost comparison measure.
- Early repayment: making additional principal payments reduces the outstanding balance faster, decreasing the interest that accrues in subsequent periods and shortening the payoff timeline. This calculator models only the scheduled payment; prepayment scenarios require separate calculation.
- Variable-rate loans adjust the interest rate periodically based on a benchmark rate (such as the federal funds rate or SOFR). This calculator models only fixed-rate loans.
What is a loan calculator?
A loan calculator uses the amortization formula to determine the fixed monthly payment needed to repay a loan principal in full over a specified number of months at a stated annual interest rate. Amortizing loans — the most common structure for personal, auto, and student loans — have equal monthly payments where the interest component declines each month as the outstanding principal falls, and the principal component correspondingly rises.
Total interest paid is the difference between the total of all monthly payments (monthly payment × total months) and the original principal. This figure reveals the full cost of financing: borrowing $20,000 at 7.5% for 60 months costs $4,486 in interest in addition to the $20,000 principal repaid, meaning the total cost is $24,486.
The Consumer Financial Protection Bureau (CFPB) advises consumers to compare loans using the Annual Percentage Rate (APR), which includes the interest rate plus lender fees expressed as a yearly rate. A loan with a lower stated interest rate may have a higher APR if it carries significant origination fees. This calculator does not account for fees; the total interest shown reflects only the interest on the stated principal at the stated rate.
How to use this loan calculator
- Enter the loan amount — the principal you plan to borrow.
- Enter the annual interest rate. Use the note rate (not the APR, which includes fees).
- Enter the loan term in months. Common terms: auto loans 36–72 months, personal loans 24–84 months, student loans 120–240 months.
- Read the monthly payment, total amount repaid, and total interest cost.
- To compare loan offers, recalculate with different rates or terms to see how they affect total interest.
Loan amortization formula
The fixed monthly payment is derived from the present-value annuity formula. The monthly interest rate r is the annual rate divided by 12. When the interest rate is zero (an interest-free loan), the formula simplifies to the principal divided by the number of months.
Frequently asked questions
How is a loan monthly payment calculated?
A fixed-rate loan monthly payment is calculated using the amortization formula M = P·[r(1+r)^n]/[(1+r)^n−1], where P is the loan principal, r is the monthly interest rate (annual rate ÷ 12), and n is the number of monthly payments. Each payment is the same amount, but the split between interest and principal changes each month: early payments are mostly interest; later payments are mostly principal.
What is loan amortization?
Loan amortization is the process of paying off debt through regular installment payments that cover both interest and principal. In a fully amortizing loan, all scheduled payments are equal and the balance reaches exactly zero after the final payment. The amortization schedule shows how each payment is split between interest (accrued on the remaining balance) and principal reduction.
What is the difference between interest rate and APR for loans?
The interest rate (or note rate) is the cost of borrowing the principal, expressed as an annual percentage and used to calculate the monthly payment. The Annual Percentage Rate (APR) includes the interest rate plus lender fees (origination fees, discount points, mortgage insurance) expressed as a standardized annual cost. The Truth in Lending Act (TILA) in the United States requires lenders to disclose APR so consumers can compare offers on a consistent basis.
Does a shorter or longer loan term save money?
A shorter loan term reduces total interest paid because the principal is outstanding for fewer months, but it increases the monthly payment. A longer term reduces the monthly payment but means interest accrues for more periods, raising total cost significantly. For the same principal and rate, choosing a 36-month term over 60 months typically saves hundreds to thousands of dollars in total interest, depending on the loan size and rate.
What is SOFR and why does it matter for loans?
The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate published by the Federal Reserve Bank of New York, based on overnight lending in the US Treasury repo market. It replaced LIBOR as the primary reference rate for variable-rate loans and financial contracts in the United States. Borrowers with variable-rate loans (such as some student loans, adjustable-rate mortgages, or business credit lines) may see their rate adjust when SOFR changes.
References
- Consumer Financial Protection Bureau (CFPB). What is an amortization schedule? consumerfinance.gov.
- Consumer Financial Protection Bureau (CFPB). What is APR and how does it affect my loan? consumerfinance.gov.
- Federal Reserve Board. Truth in Lending Act (TILA) — Regulation Z overview. federalreserve.gov.
- Brealey RA, Myers SC, Allen F. Principles of Corporate Finance (13th ed.). McGraw-Hill, 2020. Chapter 2: Present values and loan amortization.
- Federal Reserve Bank of New York. SOFR — Secured Overnight Financing Rate. newyorkfed.org.