Loan calculator

How a loan payment is calculated

Every payment you make splits in two: part goes to interest (what the bank charges for lending to you) and part to principal (what actually reduces your debt). At the start it is nearly all interest; at the end it is nearly all principal. That is why paying down early saves so much.

The formula for the fixed-payment system, by far the most common, is this:

• P — amount financed (loan amount minus the down payment)
• i — monthly rate (the annual rate divided by 12)
• n — number of months

Fixed payment vs. fixed principal

Two ways of spreading the same debt over time:

• Fixed payment: you always pay the same amount. It is easy to budget for and it is what almost every bank offers by default.
• Fixed principal: you repay the same slice of principal every month, so the payment starts higher and falls. You pay less interest in total, because the balance drops faster from day one.

Switch systems in the calculator with the same numbers: the fixed-principal total interest is lower, in exchange for a bigger effort in the first months.

What this calculator does not include

The result is the pure financing cost. A real loan usually adds an origination fee, tied insurance, appraisal (on mortgages) and sometimes servicing charges. That is why you should always compare by APR, which bundles all of that in, and not by the nominal interest rate alone.

It also assumes a fixed rate: if your loan tracks an index that moves, the payment will be recalculated at every reset.

How to pay less interest

• Shorten the term as much as your budget can take without choking you.
• Put more down: every unit you do not finance is interest you never pay.
• Make extra payments when you can, and ask for them to shorten the term rather than lower the payment if your goal is saving interest.
• Negotiate or refinance: a tenth of a point on the rate, over twenty years, is a lot of money.