Loan Calculator: How Monthly Payments, Interest & Amortization Work

Understanding how loans work mathematically helps you make smarter borrowing decisions and potentially save thousands in interest.

The loan payment formula

Monthly Payment (M) = P × [r(1+r)^n] / [(1+r)^n – 1]

P = Principal (loan amount)
r = Monthly interest rate (annual ÷ 12 ÷ 100)
n = Total number of payments

Example: $250,000 loan at 6.5% for 30 years:

• r = 6.5 / 12 / 100 = 0.005417
• n = 30 × 12 = 360 months
• M = $1,580.17/month
• Total interest: $318,861 (more than the principal!)

How amortization works

Each payment splits between principal and interest. Early payments are mostly interest because you owe the full balance. Over time, more goes to principal as the balance shrinks.

Year	Monthly Payment	Interest Portion	Principal Portion
1	$1,580	$1,344 (85%)	$236 (15%)
15	$1,580	$867 (55%)	$713 (45%)
30	$1,580	$10 (1%)	$1,570 (99%)

The power of extra payments

Adding just $200/month extra to a $250,000 loan at 6.5%:

• Saves $76,000 in total interest
• Pays off 7 years early (23 years instead of 30)
• Each extra dollar goes 100% to principal

Shorter term vs longer term

Loan	15-Year	30-Year
Monthly payment	$2,177	$1,580
Total interest	$141,901	$318,861
Interest saved	$176,960	—

The 15-year loan costs $597 more per month but saves $177,000 total.

Tips for borrowers

1. Compare APR, not just rate — APR includes fees
2. Extra payments early matter most — $100 extra in year 1 saves more than in year 20
3. Bi-weekly payments — Making half-payments every 2 weeks = 13 full payments per year (one extra)
4. Refinance when rates drop — Even 0.5% lower can save thousands over the loan life

Calculate your loan with our Loan Calculator — includes full amortization schedule, extra payment analysis, and side-by-side comparison.