How to Calculate a Loan Payment: Formula & Example 2026

What a loan payment is

Your loan payment is the amount you pay the lender every month to pay off what you borrowed — principal and interest only. Principal is the money you borrowed; interest is the lender’s charge for lending it. A $25,000.00 loan at 7.5% APR over 5 years costs $500.95 a month — $30,056.92 in total, of which $5,056.92 is interest. This guide works through the four steps that turn a loan amount into that number, and shows you what the number leaves out.

Step 1: Turn the APR into a monthly rate

The APR is a yearly rate, but you pay monthly — so divide it by 12. At 7.5% APR the monthly rate is 7.5% ÷ 12 = 0.625% a month, or 0.00625 as a decimal. That small number does all the work in the formula: it is the rate applied to your balance every month. At 10% APR the monthly rate is 0.8333% and the payment rises to $531.18.

Step 2: Count the payments

Multiply the term in years by 12. A 5-year loan is 5 × 12 = 60 payments; a 3-year loan is 3 × 12 = 36 payments. The number of payments is the exponent in the formula, and it is why the term matters so much: every extra year adds 12 payments of interest. The first payment is November 2026 and the last is October 2031 — the first payment plus 60 − 1 months.

Step 3: Apply the formula

The payment formula is M = P·r(1+r)^n / ((1+r)^n − 1), where P is the loan, r is the monthly rate and n is the number of payments. With P = $25,000.00, r = 0.00625 and n = 60, the payment is $500.95 a month. The formula looks heavy, but it does one simple thing: it spreads the loan evenly so that every payment is the same and the balance reaches exactly zero on the last payment.

Step 4: Check the total interest

Multiply the payment by the number of payments, then subtract the loan. $500.95 × 60 = $30,056.92 paid in total; minus the $25,000.00 loan, that is $5,056.92 of interest. That is the number to compare when you shop for a rate: two and a half points of APR, from 7.5% to 10%, lifts the total interest to $6,870.57. Totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

The worked example

$25,000.00 loan, 7.5% APR, 5 years. Monthly rate: 7.5% ÷ 12 = 0.625%. Payments: 5 × 12 = 60. Payment: $25,000.00 × 0.00625 × (1.00625)^60 / ((1.00625)^60 − 1) = $500.95. Total paid: $500.95 × 60 = $30,056.92. Total interest: $30,056.92 − $25,000.00 = $5,056.92. Payoff: October 2031. Totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

Shorter terms cost less interest

Cut the term to 3 years and the payment rises to $777.66 — but the total interest falls to $2,995.60, and the payoff moves to October 2029. The payment goes up because the same loan is repaid in fewer payments; the interest falls because the balance shrinks faster. Stretch the term to 7 years and the payment falls to $383.46, but the total interest rises to $7,210.38. The shortest whole-year term whose monthly payment stays under $600 is 5 years (payment $500.95); at 4 years it is $604.47 — above $600.

Working backwards

The formula runs backwards too. A $500 monthly payment supports a $24,952.65 loan at 7.5% over 5 years. A $450 monthly payment needs an APR of 3.07% (exact 3.0704%); at the displayed 3.07% the payment is $450.00, and at the exact 3.0704% it is $450.00. A $750 monthly payment supports a $37,428.98 loan, and a $1,000 monthly payment supports $49,905.31.

Extra payments

Paying extra toward the principal every month shortens the loan and cuts the interest. Adding $100.00 a month ends the loan in 49 months (November 2030), 11 months early, and saves $1,013.66 of interest. To pay the loan off in 3 years instead of 5 you need $276.71/mo extra — the smallest cent value that achieves 36 months; with the rounded extra the loan ends in 36 months with total interest $2,995.58 and interest saved $2,061.34. One cent less, $276.70/mo, gives 37 months — the bisection threshold is $276.705, and $276.70 still takes 37 months.

What the payment leaves out

The payment this guide calculates is principal and interest ONLY. It leaves out taxes, insurance, fees and any origination charge — costs that most borrowers pay on top of it. It also assumes a fixed rate and equal monthly payments for the whole term, and that the first payment month is the month after the loan starts. At 0% APR the payment is $416.67 — $25,000.00 ÷ 60, no interest at all. A $0 loan has a payment of $0.00.

How this connects

Run your own numbers with the loan calculator; for paying a loan off early, see the loan payoff calculator; for the extra-payment plan in detail, see the extra loan payment calculator.