How Loan Payments Work (and How to Calculate Them)

Whether it's a mortgage, a car loan, or a personal loan, a fixed-rate loan has one reassuring feature: the monthly payment never changes. But what goes on inside that payment changes every single month.

The monthly payment formula

A fixed loan is amortized — engineered so that a constant payment pays it off exactly at the end of the term. The payment is:

M = P · r(1+r)^n / ((1+r)^n − 1)

where P is the amount borrowed, r is the monthly interest rate (the annual rate ÷ 12), and n is the number of payments. You rarely need to do this by hand — the loan & mortgage calculator does it and shows the totals instantly.

Interest first, principal later

Each payment is split in two:

1. Interest on the current balance.
2. Principal, which is whatever is left of the payment.

Early on, the balance is large, so most of the payment is interest and only a sliver reduces the balance. As the balance falls, the interest portion shrinks and the principal portion grows. This is why, on a 30-year mortgage, you've paid off surprisingly little principal after the first few years.

The calculator's amortization table makes this visible — watch the interest column fall and the principal column rise year over year.

What drives the total cost

• Rate. Even a 1-point difference in the rate can change the total interest

by tens of thousands over a long term.

• Term. A longer term lowers the monthly payment but raises the total

interest, because the balance is outstanding for longer.

• Extra principal. Paying a little more than required goes straight to

principal, shortening the loan and cutting total interest.

Try a few scenarios

1. Enter your amount, rate, and term in the

loan & mortgage calculator.

1. Compare a 15-year vs. a 30-year term and note the total-interest difference.
2. Curious how the lender earns it? The interest portion is just simple interest

on the balance each month — see the simple interest calculator.

Knowing how the payment is built helps you shop for a better rate, pick the right term, and decide whether paying extra is worth it.