Calculate Your Loan Payments: A Simple Guide

A bank charges interest on loans to make a profit.

When you take out a loan, you need to calculate how much you will have to pay each month in order to pay off the loan by the end of the loan term. The formula for calculating the loan payment requires you to know how much you borrowed, how long you will take to repay the loan and the interest rate you will pay. By knowing how much the monthly payment will be, you can better judge how a loan will fit into your budget.

Step 1

Convert your annual percentage interest rate to a monthly interest rate expressed as a percentage by dividing it by 1,200. For example, if your annual rate equals 9.78 percent, you would divide 9.78 by 1,200 to get 0.00815 as your monthly interest rate expressed as a decimal.

Step 2

Compute the monthly interest rate expressed as a decimal times the loan amount. In this example, if you were borrowing $18,000, you would multiply $18,000 by 0.00815 to get $146.70.

Step 3

Add 1 to the monthly interest rate expressed as a decimal. Continuing the example, you would add 1 to 0.00815 to get 1.00815.

Step 4

Determine the number of monthly payments you will make on the loan. If the loan term is listed in years, multiply the number of years by 12 to find the number of months. For example, if you were taking out a three-year loan, you would multiply 3 by 12 to get 36.

Step 5

Make the result from Step 4 negative. In this example, you would make 36 into -36.

Step 6

Raise the result from Step 3 to the result from Step 5 using a calculator. In this example, you would raise 1.00815 to the -36th power to get 0.746611095.

Step 7

Calculate 1 minus the result from Step 6. Furthering this example, you would subtract 0.746611095 from 1 to get 0.253388905.

Step 8

Divide the result from Step 2 by the result from Step 7 to find your monthly loan payment. In this example, you would divide $146.70 by 0.253388905 to find your monthly loan payment would be $578.95.

Tip

You can also use online loan calculators to find the monthly payment (see Resources).