You don't need software to work out a monthly loan payment — just one formula, three numbers, and a calculator.
The formula
Monthly loan payments are calculated using the standard amortization formula: M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the loan principal (the amount borrowed), r is your monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments (loan term in years × 12).
Step 1: Convert your annual rate to a monthly rate
Take your loan's annual interest rate and divide it by 12. For example, a 6% annual rate becomes a monthly rate of 0.5%, or 0.005 when written as a decimal — this is the number you'll use as r in the formula.
Step 2: Work out your total number of payments
Multiply your loan term in years by 12. A 30-year mortgage has 360 monthly payments; a 5-year car loan has 60.
Step 3: Plug the numbers into the formula
For a $300,000 loan at 6% annual interest over 30 years: r = 0.005, n = 360. Working through the formula gives a monthly payment of $1,798.65 — the same result you'd get from any online loan calculator, since they're all using this identical formula underneath.
Why lenders use this specific formula
This formula guarantees that by your final payment, you'll have paid off the loan exactly — no more, no less — while paying interest only on the remaining balance each month. Early payments are mostly interest since the balance is still high; later payments are mostly principal since the balance has shrunk.
Skip the manual math
If you'd rather not do the calculation by hand, our free loan calculator does this instantly — just enter your loan amount, interest rate, and term to see your monthly payment, total paid, and total interest.
FAQ
What's the loan payment formula called?
It's called the amortization formula, and it's the standard method used by virtually all lenders, mortgage calculators, and financial software to calculate fixed monthly loan payments.
Do I need to know the formula to use a loan calculator?
No — the formula is useful if you want to understand what's happening behind the scenes or verify a number by hand, but our loan calculator does the full calculation instantly.
Why do early payments feel like they barely reduce my balance?
Because interest is calculated on your remaining balance each month, and that balance is highest at the start of the loan — so a larger share of your early payments goes toward interest rather than principal.
How much interest do you pay on a 30-year loan vs a 15-year loan?
On a $300,000 loan at 6% APR, a 30-year term costs about $347,515 in total interest, versus about $155,683 for a 15-year term — more than double, because you're paying interest on the balance for twice as long.
Can I calculate a loan payment without knowing exponents?
The formula does require raising (1+r) to the power of n, which is hard to do by hand precisely — a calculator with an exponent (x^y) function, a spreadsheet's PMT formula, or our loan calculator above will get you an exact result without manual approximation.
What is the monthly payment on a $20,000 loan at 6% over 5 years?
About $386.66 a month. You would repay $23,199.36 in total, of which $3,199.36 is interest.
How can I check my loan payment calculation?
Build a short amortisation table: interest each month is the balance times the monthly rate, and the payment minus interest reduces the balance. If the balance after the last payment is zero (allowing for a cent of rounding), your payment is correct.
Does paying extra each month change the formula?
The formula gives the minimum payment. Extra money goes to principal, so the balance falls faster and the loan ends sooner, which reduces the total interest.