Finance · 5 min read
How to Calculate a Personal Loan Payment (Formula and Example)
A personal loan payment is calculated with a standard amortization formula that turns your loan amount, interest rate and term into one fixed monthly payment. You can check your own numbers in seconds with our loan calculator, but it helps to know what is happening under the hood before you sign for anything.
The amortization formula
Lenders use this formula to set a fixed monthly payment: M = P x [r(1+r)^n] / [(1+r)^n - 1], where M is the monthly payment, P is the loan principal, r is the monthly interest rate (your annual rate divided by 12), and n is the total number of monthly payments.
The formula looks dense, but each piece is simple. P is just the amount you borrow. r converts your yearly rate into a monthly one, since interest accrues every month, not once a year. n is your loan term in months, so a 5 year loan is n = 60.
A worked example
Say you borrow $15,000 at a 7% annual rate over 5 years (60 months). First convert the rate: r = 0.07 / 12 = 0.005833. Plug P = 15000, r = 0.005833 and n = 60 into the formula and the monthly payment comes out to about $297.02.
Over 60 months you pay $297.02 x 60 = $17,821.08 in total, which means $2,821.08 of that is interest on top of the $15,000 you borrowed. Every fixed rate personal loan works this same way regardless of the lender.
How the loan term changes your payment
The same $15,000 at 7% looks very different depending on the term you choose.
- 36 months: $463.16 a month, $1,673.63 total interest
- 60 months: $297.02 a month, $2,821.08 total interest
- 84 months: $226.39 a month, $4,016.78 total interest
A shorter term means a higher monthly payment but noticeably less interest paid overall, because the balance shrinks faster and less of it sits around accruing interest. A longer term frees up monthly cash flow at the cost of paying more for the same loan over time.
Why your interest rate matters so much
Interest rate is the other lever, and lenders set it mostly based on credit score, income and the loan term itself. A borrower with strong credit might qualify for 6% where someone with fair credit is quoted 12% or higher on an otherwise identical loan. Because r is compounded through every month of the loan, even a few percentage points of difference changes the total interest by hundreds or thousands of dollars over a multi year term.
Fixed rate vs variable rate loans
Most personal loans use a fixed rate, meaning r stays constant for the life of the loan and your payment never changes. Variable rate loans instead tie r to a benchmark index, so the payment can rise or fall as that index moves. Fixed rate loans are easier to budget around since the formula above gives you the exact payment for every month of the term, while a variable rate loan only gives you that certainty for the current period.
Frequently asked questions
What is the formula to calculate a loan payment?
M = P x [r(1+r)^n] / [(1+r)^n - 1], where M is the monthly payment, P is the loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments.
Does a longer loan term always cost more?
Yes, for the same principal and rate, a longer term lowers your monthly payment but increases the total interest paid, since the balance takes longer to pay down and accrues interest for more months.
What is the difference between interest rate and APR on a personal loan?
The interest rate only reflects the cost of borrowing the principal, while APR also folds in lender fees like origination charges, giving a more complete picture of the loan's true annual cost.