How Monthly Loan Payments Are Calculated
Understanding how a loan payment is derived can help you make better financial decisions. This calculator uses the standard amortization formula used by PSECU and most other financial institutions.
The Formula
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
- M: Total monthly payment
- P: Principal loan amount
- i: Monthly interest rate (Annual Rate / 12)
- n: Number of payments (Loan term in months)
Principal vs. Interest
Each monthly payment is split between paying down the principal balance and paying interest to the lender. In the early stages of a long-term loan (like a mortgage), a large portion of your payment goes toward interest. As the loan matures, more of your payment goes toward principal.
Strategies to Lower Your Payment
- Extend the Term: Choosing a longer repayment period reduces the monthly payment but increases the total interest paid over the life of the loan.
- Lower the Rate: Improving your credit score or refinancing when rates drop can significantly reduce your monthly obligation.
- Make a Down Payment: Borrowing less upfront directly lowers your monthly payment.
Frequently Asked Questions
Can I use this for any type of loan?
Yes! This is a universal calculator suitable for any fixed-rate installment loan, including personal loans, auto loans, boat loans, RV loans, or business term loans.
What if I make extra payments?
Making extra payments directly reduces your principal balance. This shortens the loan term and reduces the total interest you will pay. Even a small extra amount each month can make a big difference.
Does this include taxes and insurance?
No, this calculator only estimates Principal and Interest. If you are calculating a mortgage payment, please use our PSECU Mortgage Calculator which includes fields for taxes, insurance, and PMI.