How an amortized loan works
Every payment on a fixed-rate installment loan is the same size, but the way that fixed amount is split changes from month to month. The lender first takes the interest owed on the current balance, then applies whatever remains to the principal you still owe.
Since interest is calculated on the outstanding balance, the interest charge is at its biggest when the balance is highest — right at the beginning. That is why the first payments barely move the balance, while the last payments are almost entirely principal.
Reading your results
The monthly payment is what you commit to each period. Total interest is the extra you pay for the privilege of borrowing, and total of payments is principal and interest added together — the real cost of the loan from start to finish.
The donut chart shows what share of your total outlay is the money you borrowed versus pure interest. The balance line traces how the debt falls year by year, and the yearly table puts numbers to that same curve.
Tips to cut the interest bill
Interest follows the balance, so the faster the balance drops, the less you pay overall.
- Pick the shortest term whose payment you can comfortably afford.
- Round payments up or add an occasional extra amount directed at principal.
- Shop several lenders — even a fraction of a percent on the rate adds up over the term.
- Avoid loans with prepayment penalties so you keep the option to pay ahead.
What to keep in mind
This estimate assumes a single fixed rate, equal payments and no fees rolled into the balance. Origination fees, late charges or a variable rate would change the real cost. Always confirm the figures in your loan agreement before signing.
Formula
r = annualRate/100/12; payment = P·r / (1 − (1+r)⁻ⁿ)Frequently asked questions
- How is a monthly loan payment calculated?
- From the amount borrowed, the monthly rate and the number of payments, using the standard amortization formula. Each payment covers that month’s interest first, and the rest reduces the balance.
- What is the difference between interest rate and APR?
- The interest rate is the cost of borrowing alone. APR folds in fees and charges, so it is the more honest figure when comparing offers.
- Does a longer term save me money?
- It lowers the monthly payment but raises the total interest, because you are borrowing for longer. Compare the total cost figure, not just the monthly one.