How do I calculate interest on a loan?

Multiply the current balance by the monthly rate. For a 25,000 balance at 6.5% a year, one month of interest is about 135.42.

Why is so much of an early payment interest?

Interest is charged on the balance, which is largest at the start. As the balance falls, more of each payment reduces it.

What is the difference between APR and the interest rate?

The APR includes certain fees as well as interest, so it is usually a little higher than the nominal rate.

Money basics

How to Calculate a Loan Payment

The standard formula for a fixed-rate instalment loan, worked through with real numbers, plus how interest is split from principal.

By Editorial Team · Updated September 19, 2026 · 2 min read

A fixed-rate loan is repaid in equal monthly instalments. Each instalment covers the interest that has built up on the remaining balance, and the rest reduces the balance.

The formula

Payment = P × r ÷ (1 − (1 + r)^−n)

P = amount borrowed
r = monthly interest rate (annual rate ÷ 12 ÷ 100)
n = number of monthly payments

Example 1: a car loan

Borrow 25,000 at 6.5% a year for 5 years.

r = 6.5 ÷ 12 ÷ 100 = 0.0054167
n = 5 × 12 = 60
Payment = 25,000 × 0.0054167 ÷ (1 − 1.0054167^−60) = 489.15 a month

Over 60 payments you repay 29,349.22, so the interest is 4,349.22.

Example 2: a mortgage

Borrow 200,000 at 6% for 30 years. The monthly payment is 1,199.10. Across 360 payments the total repaid is 431,676.38, of which 231,676.38 is interest, more than the amount borrowed.

How interest and principal change

In the first month of the car loan, interest is 25,000 × 0.0054167 = 135.42, so about 353.74 of the 489.15 reduces the balance. The next month's interest is calculated on the smaller balance, so a little more of each payment goes to principal. Early payments are mostly interest, and late payments are mostly principal.

Shorter terms and higher rates

A longer term lowers the monthly payment but raises the total interest, because you owe money for longer. A higher rate raises both. Comparing the total repaid, not just the monthly figure, shows the real cost.

What the formula leaves out

Fees, insurance and taxes, which are added to some loans.
The difference between the nominal rate used here and the APR, which includes certain fees.
Variable rates, which change the payment over time.
Extra repayments, which shorten the term and cut interest.

Common mistakes

Using the annual rate as the monthly rate.
Entering the term in years where the formula needs months.
Judging affordability by the monthly payment alone.

The loan payment calculator shows the payment, total interest and a year-by-year balance.

Try it yourself

What is the monthly payment on a 10,000 loan at 0% over 24 months?
What monthly rate corresponds to a 9% annual rate?
How much interest accrues in the first month on a 12,000 balance at 6% a year?

Answers: (1) 416.67 (10,000 ÷ 24); (2) 0.75% a month (9 ÷ 12); (3) 60 (12,000 × 0.005).

Frequently asked questions

How do I calculate interest on a loan?: Multiply the current balance by the monthly rate. For a 25,000 balance at 6.5% a year, one month of interest is about 135.42.
Why is so much of an early payment interest?: Interest is charged on the balance, which is largest at the start. As the balance falls, more of each payment reduces it.
What is the difference between APR and the interest rate?: The APR includes certain fees as well as interest, so it is usually a little higher than the nominal rate.

About the author

Editorial Team. The Editorial Team writes, checks and maintains every tool and guide on this site. The calculation logic behind the calculators is covered by automated tests, examples are worked out and re-checked before publishing, and pages are updated when we find a mistake or a rule changes. Corrections are welcome through the contact page.

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