How to Calculate a Loan Payment by Hand (and Check It With a Tool)

Before you sign any loan — a car loan, a personal loan, a mortgage — you should be able to answer one question without trusting anyone: what will my monthly payment actually be?

Lenders make this easy with online calculators, but knowing how the number is produced tells you far more: how much interest you’ll pay over the life of the loan, why extra payments matter so much early on, and why two loans with the same rate can have very different total costs.

The standard amortized loan payment formula

Almost every fixed-rate, fully amortized loan (mortgages, auto loans, most personal loans) uses this formula:

M = P × [ i(1 + i)^n ] / [ (1 + i)^n − 1 ]

Where:

• M = monthly payment
• P = principal (the amount you borrow)
• i = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (years × 12)

The one mistake that trips most people up: you must convert the annual rate to a monthly rate, not just divide the annual interest by 12. A 6% annual rate means i = 0.06 / 12 = 0.005, and that decimal — not 6 — goes into the formula.

A worked example: $20,000 car loan at 6% for 5 years

Let’s plug in real numbers.

Step 1: Find the monthly rate. i = 6% ÷ 12 = 0.5% = 0.005

Step 2: Find the number of payments. n = 5 years × 12 = 60 payments

Step 3: Calculate (1 + i)^n. (1.005)^60 ≈ 1.34885

Step 4: Apply the formula.

M = 20,000 × [0.005 × 1.34885] / [1.34885 − 1] M = 20,000 × 0.0067443 / 0.34885 M = 20,000 × 0.019333 M ≈ $386.66 per month

Step 5: Find the total cost. 60 × $386.66 = $23,199.35 total paid, of which $3,199.35 is interest — about 16% of everything you borrow. That’s the number lenders don’t put in bold.

Where your money goes each month

Early in the loan, most of each payment is interest, not principal. On that $20,000 loan:

• Payment #1: ~$100.00 goes to interest, only ~$286.66 reduces your balance
• Payment #30: ~$52.88 goes to interest, ~$333.78 goes to principal
• Payment #60: ~$1.92 goes to interest, ~$384.74 goes to principal

This is why making even one extra principal payment per year can shorten a 5-year loan by months — you’re attacking the balance while it’s still large.

Sanity checks that catch most mistakes

1. Rate check: monthly payment should be between P/n (zero interest) and roughly P/n + P × annualRate/2 ÷ 12. If your answer is outside that range, you probably mis-converted the rate or the term.
2. Interest check: total interest on a 5-year loan at 6% should be roughly 15–17% of the principal. On a 30-year mortgage at 6%, total interest can exceed the amount borrowed — long terms change everything.
3. Rate sensitivity: at 9% instead of 6%, the same $20,000/60-month loan jumps to about $415.17 — an extra $1,710 over the life of the loan.

Then verify with a tool

Doing it by hand once is worth it — you’ll never look at a loan offer the same way again. For everything else, the fastest path is a calculator that also breaks down interest and total cost:

Try the free Loan Calculator →

Enter the amount, annual rate and term, and you’ll get the monthly payment, total interest and total repayment instantly — the exact same math as the formula above, with none of the arithmetic risk.

And if you want to quickly compare what a rate difference costs you, the Percentage Calculator can tell you the percentage change between two payment quotes in one step.