A personal loan gives you a lump sum that you repay in equal monthly installments over a fixed term, usually a few years. Because the rate and the payment are set at the start, it is easy to budget for, whether you are consolidating card balances or paying for a repair. What varies a lot from offer to offer is the total cost, and that depends mostly on the rate and how long you take to repay.
How the loan payment formula works
A fixed-rate personal loan is amortized: every payment is the same, and each one covers that month's interest plus a slice of principal. The formula uses P, the amount borrowed; r, the monthly rate, which is the APR divided by 12 (7.9% becomes about 0.658% a month); and n, the number of monthly payments, 60 on a five-year loan.
In the first months, a larger share of each payment goes to interest, because the balance is at its highest. As the balance shrinks, the interest charge shrinks with it and more of the same payment goes to principal. The payment is sized so that the last one brings the balance to exactly zero.
Worked example: a $20,000 personal loan
For example, imagine you take out a $20,000 loan for 5 years at an interest rate of 7.9%. Your standard monthly payment is $404.57. Over the 60-month term, you will pay a total of $4,274.28 in interest, making your total amount paid $24,274.28.
Now add an extra $100 to every payment, for $504.57 a month. The extra goes straight to principal, so the loan is paid off in 47 months instead of 60, and total interest falls by $1,021.93. The required payment is still $404.57, which means you can stop the extra in a tight month without falling behind.
What moves your payment the most
Term and rate set the total cost. Cutting the same $20,000 loan from five years to three raises the payment from $404.57 to $625.81, but interest drops from $4,274.28 to $2,528.98. A voluntary extra payment gets part of that saving without committing you to the higher required amount. When you compare offers, compare the APR rather than the headline rate, since the APR folds in fees such as origination charges. Carrying credit card balances instead? The debt payoff calculator shows how long they take to clear.
Limits and assumptions
This estimate assumes a fixed interest rate, equal monthly payments, and no origination fees rolled into the loan balance. Some lenders charge an origination fee, often between 1% and 8% of the loan, which either reduces the cash you receive or adds to the balance. The calculator does not model late fees, prepayment penalties, or variable rates that can fluctuate. Use the result as a planning estimate and always read the exact terms in your final loan agreement. For a vehicle, the auto loan calculator also adds sales tax and your trade-in.
Key terms
- Principal
- The original sum of money borrowed, before any interest or origination fees are applied.
- Interest rate
- The cost of borrowing the principal from the lender, expressed as an annual percentage.
- Amortization
- The process of paying off the loan through regular, equal installments over a set period of time.
- Origination fee
- An upfront fee charged by a lender to process the application, often deducted from the loan proceeds.
- Term length
- The total amount of time you have to repay the loan in full, usually measured in months or years.