How to Calculate Loan Payments and Costs

Any time you plan to borrow money, it always makes sense to calculate loan payments and costs ahead of time. After all, you need to know what your monthly payment will be like, as well as how loan fees and interest charges will impact your total borrowing costs.

Let's dive into the ins and outs of how different types of loans work, as well as the steps you can take to calculate loan payments and save money on your loan each time you borrow money.

How loan payments work

It's important to understand the most important terms that come into play in the loan industry. These terms will ultimately impact how much you pay toward various loans each month, plus how long you'll be stuck making monthly payments.

• Fees: First, you should note that many types of loans have fees, including application fees and late fees. Some also charge an upfront origination fee, which is automatically added to the amount you owe. If you take out a personal loan for $10,000 with a 6% origination fee, for example, you'll begin repaying your loan with a balance of $10,600.
• Interest: Interest is the extra money charged by the lender to facilitate your loan each month. The interest rate on some financial products like auto loans and personal loans is typically fixed, meaning it does not change over the life of the loan. However, interest rates on some products like credit cards tend to be variable, meaning they fluctuate over time based on market conditions.
• Principal: Most loans require you to pay some money each month toward the original balance you borrowed, which is presented as the principal balance of your loan. However, your loan's principal will decrease over time. If you took out a $10,000 loan and paid off $400 so far, for example, the new principal of your loan would be $9,600.
• Repayment term: The repayment term is how long you agreed to repay a loan. This could be anywhere from two years to seven years with an auto loan, but all the way up to 30 years with a mortgage. Also note that revolving credit accounts like credit cards don't actually come with a repayment term. You can use resolving accounts for purchases and keep making payments in perpetuity as long as the account remains open.

To show an example of how each of these factors impacts a loan payment, let's imagine a $10,000 personal loan with a 5% origination fee and no other fees, a fixed 10% interest rate and a repayment term of five years. 

Using a loan calculator, we quickly find that the monthly payment on this loan works out to $223.09. We go over how amortization works and how to use a loan calculator in the sections below.

Loan payment formula

There are a few different formulas you can use to calculate loan payments and costs. These formulas can apply to student loans, car loans, your mortgage payment and more. However, you'll want to note the kinds of loans out there to figure out which loan payment formula you'll use.

Interest-only loans

Some loans are interest-only, which may seem strange since you would never pay them off that way. However, loans in this category are typically meant to be used on a temporary basis, meaning you use them for a while before upgrading to a better loan. With an interest-only mortgage, for example, you would get into the home you want and make interest-only payments with the eventual goal of refinancing your loan into an amortizing loan that helps you pay down the principal balance over time.

Either way, interest-only loans have you paying interest each month with $0 deducted from the principal balance. This lets you pay a lower monthly payment, but with the knowledge you'll never actually pay the balance off unless you refinance to an amortizing loan or begin making extra principal payments.

Amortizing Loans

Loans that come with a set repayment term use an amortization schedule that outlines how much goes toward interest and principal each month. With an amortizing loan, you'll pay more interest each month toward the beginning of the loan, yet your monthly interest charges will decrease regularly as you make progress toward paying down the principal balance.

If you decide to make extra payments, you get the chance to move up a notch on the amortization schedule, save money on interest and get out of debt faster. Just make sure the loan you decide to make additional payments toward doesn't charge any early payment penalties.

Using the example above of a $10,000 personal loan with a 5% origination fee and no other fees, a fixed 10% interest rate and a repayment term of five years, the chart below shows how the amortization table would look for the first 12 months. As you can see, you make an interest payment and a principal payment each month, and the amount you owe drops by a little bit more with each payment you make. You can also see that the 5% origination fee has been added to the principal amount upfront.

Using a loan calculator

Using a loan calculator is far and away the best and easiest way to calculate loan payments and costs. The calculator below can tell you exactly what your monthly payment will be depending on your loan amount, repayment term and interest rate. You can also use this calculator to calculate the full costs of borrowing, including all interest charges and loan fees.

Note: You can use this calculator to calculate costs on student loans, your mortgage, a car loan or even a personal loan.

How to calculate total loan costs

To calculate how much a loan will cost you, you'll need to add up the total interest charges for the life of your loan and combine that amount with any loan fees you paid. If you didn't pay any loan fees like an origination fee, then the total cost of your loan is made up of interest charges.

Of course, your total loan costs also include the principal amount you borrowed in the first place. Fortunately, there is a quick and easy formula you can use to figure out total loan costs on a loan with a fixed interest rate.

All you need to do is take your monthly payment and multiply it by the number of months you have to make it. With the example loan we already shared above ($10,000 personal loan with a 5% origination fee and no other fees, a fixed 10% interest rate and a repayment term of five years), the monthly payment works out to $223.09 and the total loan cost comes in at $13,385.64.

$223.09 X 60 months = $13,385.64

Since $10,000 of your total loan costs are the amount you actually borrowed, the example loan requires a $500 origination fee and $2,885.64 in interest payments alone.

Understanding loan payment terminology

Making sure you know about all the common loan terminology before you borrow money can help ensure you don't sign up for something you don't understand. 

Loan amount

A loan amount is how much money you are borrowing upfront. However, your loan amount will also decrease over time on amortizing loans that have you paying some interest and some money toward the principal of your loan balance each month.

Number of months

The number of months you pay your loan is also known as the loan's repayment term. This timeline can last up to 30 years with many common mortgage products, and up to 25 years with various types of student loans. Other loans, like auto loans and personal loans, tend to have repayment terms under ten years.

Annual percentage rate 

Your annual percentage rate (APR) is the total cost you pay each year to borrow money, including interest and fees. The higher the APR, the more interest and fees you'll have to pay over the loan's repayment term.

Payment method

Your payment method is the method you use to make your loan payment. As an example, you may pay your bills with a check, a money order, an ACH transfer, or through automatic bill payment set up through your financial institution.

Monthly payment

Your monthly payment on a loan is the amount you pay each month including interest and principal. This amount can be lower when interest rates are low, but it will inch up if your interest rate is on the high side.

Total interest

Total interest is a term used to describe how much interest you pay over the life of a loan. This amount includes each monthly interest payment you make during a loan's repayment term that you add up to get a total.

How to lower your monthly loan payment

To get a lower monthly loan payment, consider the following tips:

• Try to borrow less: The less money you have to borrow upfront, the lower your monthly payment will be each month. If there's any way to keep your loan amount down, you should try.
• Shop around for the lower rate: No matter whether you're applying for an auto loan, a personal loan or a private student loan, you should compare at least three loan offers to make sure you get the lowest possible interest rate.
• Extend your repayment term: While repaying your loan over a longer timeline has its own challenges, choosing a longer repayment term will always leave you paying less toward your loan each month.
• Refinance your loan: If you currently have a loan you have made a lot of progress on, refinancing your new, lower loan amount with a new loan product could lead to a lower monthly payment. A personal loan from Upstart with a fixed APR could consolidate higher-interest rate loans to a single, lower monthly payment. That said, it’s important to do the math and make sure a new loan is better for your bottom line.

How to lower your loan interest rate 

Before you borrow money, you should take the time to check your credit score to see where it falls. After all, your credit score is one of the biggest factors lenders use when determining whether you're eligible for a loan and deciding what interest rate you'll pay. 

Another step to get a lower interest rate is shopping around among several different lenders each time you borrow money. This step will ensure you find the best possible lender for your needs, as well as one that will give you the lowest rate you can qualify for based on your credit rating.

Compare personal loan rates and offers

Frequently asked questions (FAQ)

How much would a $70,000 student loan be monthly?

Your loan payment always depends on your interest rate and repayment timeline. However, a $70,000 student loan at 8% would require a monthly payment of $849.29 on a ten-year repayment plan. On a 20-year repayment plan, the same loan would require a monthly payment of $585.51.

How much would a $50,000 loan cost per month?

Your loan payment always depends on your interest rate and repayment timeline. However, a $50,000 loan at 8% would require a monthly payment of $606.64 on a ten-year repayment plan. On a 20-year repayment plan, the same loan would require a monthly payment of $418.22.

How long will it take me to pay off a $30,000 loan?

How long it takes you to pay off $30,000 depends on your loan's interest rate and repayment timeline. If you had an 8% interest rate and paid around $364 per month, for example, you could pay this loan off over ten years. If you paid $608.29 per month, however, you could pay this loan off over five years.