Loan Calculator

How Loan Interest Works

Loan interest is calculated on the remaining principal balance each month. The monthly interest rate equals the annual rate divided by 12. The repayment method determines how quickly you pay down the principal, which directly affects total interest paid over the life of the loan.

Loan Payment Formula (Fixed Payment / Amortized)

Monthly Payment = P x [r(1+r)^n] / [(1+r)^n - 1], where P is the loan principal, r is the monthly interest rate (annual rate / 12), and n is the total number of monthly payments. This formula produces equal payments throughout the loan term.

Repayment Method Comparison

• Fixed Payment (Amortized): Equal monthly payments. Early payments are mostly interest; later payments are mostly principal. Most common for mortgages and auto loans.
• Fixed Principal: Equal principal payments each month plus decreasing interest. Higher initial payments but lower total interest. Less common but financially efficient.
• Interest-Only: Pay only interest monthly; full principal due at maturity. Lowest monthly payments but highest total interest cost.

$200,000 Loan at 6% Interest Rate Comparison

• Fixed Payment (30 years): $1,199/month, total interest $231,677
• Fixed Payment (15 years): $1,688/month, total interest $103,788
• Fixed Principal (30 years): $1,556 first month to $561 last month, total interest $181,000
• Interest-Only (30 years): $1,000/month + $200,000 at maturity, total interest $360,000

Impact of Interest Rate on a $300,000 Loan (30-year Fixed)

• 4.0%: $1,432/month, total interest $215,609
• 5.0%: $1,610/month, total interest $279,767
• 6.0%: $1,799/month, total interest $347,515
• 7.0%: $1,996/month, total interest $418,527
• 8.0%: $2,201/month, total interest $492,467

Each 1% increase in interest rate adds roughly $100,000+ in total interest over 30 years, demonstrating the enormous impact of rate shopping.

Tips for Saving on Loan Interest

• Shop around: Compare rates from at least 3-5 lenders. Even a 0.25% rate difference saves thousands over the loan term.
• Improve your credit score: A score above 740 typically qualifies for the best rates. Pay down credit cards and fix errors on your credit report.
• Make extra payments: Even small additional payments toward principal can save tens of thousands in interest and shorten your loan by years.
• Consider refinancing: If rates drop 0.5-1% below your current rate, refinancing may save money even after closing costs.
• Choose the right term: Shorter loan terms have lower rates and dramatically less total interest.

Important Notes

This calculator shows principal and interest only. Your actual monthly housing cost may also include property taxes, homeowner's insurance, PMI (if down payment is below 20%), and HOA fees. When comparing loan offers, use APR rather than just the interest rate, as APR includes fees and gives a truer cost comparison.