A personal loan can be a useful tool for consolidating debt, covering unexpected expenses, or funding a significant purchase. Understanding how your monthly payment is calculated is crucial for responsible borrowing. This calculator helps you estimate your monthly payment and the total interest you'll pay over the life of the loan.
How the Calculation Works
The calculator uses a standard loan amortization formula to determine your fixed monthly payment. The formula for calculating the monthly payment (M) of a loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
P = Principal loan amount (the amount you borrow)
i = Monthly interest rate (Annual interest rate divided by 12)
n = Total number of payments (Loan term in years multiplied by 12)
Example Calculation:
Let's say you want to borrow $15,000 (P = 15000) with an annual interest rate of 8% (Annual rate = 0.08). You plan to repay the loan over 5 years (Term = 5).
Monthly interest rate (i) = 0.08 / 12 = 0.0066667
Total number of payments (n) = 5 years * 12 months/year = 60
Total Interest = (Monthly Payment * Total Number of Payments) – Principal Loan Amount
Total Interest = ($307.72 * 60) – $15,000
Total Interest ≈ $18,643.20 – $15,000 = $3,643.20
Key Factors to Consider
Interest Rate: This is arguably the most significant factor. A lower APR means less interest paid over time. Your credit score, income, and the loan term heavily influence the rate you're offered.
Loan Term: A shorter term means higher monthly payments but less total interest paid. A longer term means lower monthly payments but more total interest paid.
Loan Amount: Borrow only what you need. Higher loan amounts naturally result in higher monthly payments and more total interest.
Fees: Be aware of potential origination fees, late payment fees, or prepayment penalties, as these can add to the overall cost of the loan.
Use this calculator as a guide. It provides an estimate based on the inputs you provide. Always consult with your lender for precise figures and terms specific to your loan offer.