How a Fixed-Rate Loan Payment Works

Quick Answer

A fixed-rate loan payment is the monthly amount that pays the borrowed balance off in equal installments. Divide the yearly rate by 12, then apply that monthly rate across the term. Borrowing 100,000 at 12% a year for 5 years costs 2,224.44 a month. You pay 33,466.83 in interest on top of the 100,000. The loan EMI calculator on this page updates that payment as you change the price, the down payment, the rate, or the term.

How the Monthly Payment Is Worked Out

You enter the price or the amount borrowed, an optional down payment, the yearly interest rate, and the term in years. The amount borrowed is the price minus the down payment. The term field is in years: 5 means five years, which is 60 months, and 20 means 240 months.

Each month the lender charges interest on whatever balance is left. The payment covers that interest first. The rest reduces the balance. Early months are mostly interest. Later months are mostly principal, because the balance the interest is charged on has shrunk. The headline number is that level monthly payment. The rows under it show the amount borrowed, the total interest, the total you pay, and when the balance reaches zero.

Loan Amortization

Payment = P × r × (1 + r)^n / ((1 + r)^n - 1)

P is the amount borrowed. r is the yearly rate divided by 12 and then by 100, so 12% a year is 0.01 a month. n is the number of months. At a zero rate the payment is simply P divided by n, and the interest is zero.

That schedule is fixed-rate amortization. The payment stays level. Only the split between interest and principal changes as the balance falls.

The Mortgage Payment

A mortgage calculator and a home loan calculator are this page with a price and a down payment filled in. A 500,000 price with a 100,000 down payment borrows 400,000. At 8.5% a year for 20 years the mortgage payment is 3,471.29, and the interest over those 20 years is 433,111.49. A 30 year term on the same price keeps the payment lower and the interest higher, because the balance sits there longer.

Property tax, insurance, and a fee a lender quotes are outside this result. The page also does not look up today's rate. You type the yearly percent you were offered.

What an Extra Payment Does

An extra monthly payment is added on top of the installment and taken off the principal. It is not a discount on the next bill. On the 100,000 loan at 12% for 5 years, an extra 500 a month clears the balance in 3 years 10 months. Interest falls from 33,466.83 to 25,227.64, which saves 8,239.19. The payoff row and the interest-saved row both move as soon as you type the extra amount.

At an extreme rate the ordinary payment can be nothing but interest. At 100% a year for 40 years the balance never falls, and the page says so. An extra payment on top of that installment is what starts paying the principal down.

Each month's interest is rounded to the cent, so the last payment can differ from the others by a few cents. For example, 150 at 12% over 3 months is 51 a month, and the last payment is 51.02. This is arithmetic, not financial advice; your lender's schedule is final.

Yearly Rate, Not a Monthly Rate

The rate field is a percent per year. 2 means 2% a year. People who quote loans as "2% a month" need 24 in this field, because 2% a month is 24% a year. When the number is under 3%, the result says that 2% a month would be 24% a year and that the payment did not use that reading. A rate above 36% gets the same kind of note in the other direction: 48% a year is about 4% a month, and the payment uses the yearly figure.

Ordinary loans sit in the quiet band. 8.5% on a home loan and 12% or 14% on a personal loan produce no unit note, because those figures already read as yearly rates.

Common Mistakes

A common mistake is typing a monthly rate into the yearly field. For example, 2 means 2% a year. Checking the EMI on a personal loan before signing, people quote "2% a month", which is 24% a year. The monthly payment calculator names that mix-up when the rate is under 3%.

Another mistake is reading the term as months, because the field says years. For example, 30 is thirty years, which is 360 months. A loan interest calculator that treats 30 as months finishes the loan in two and a half years.

A third mistake is treating an extra payment as a discount on the next installment. The extra comes off the principal. For example, 500 extra on the 100,000 loan is added to the 2,224.44 payment, and the equated monthly installment itself does not shrink.

Borrowing Compared with Investing the Same Amount

The monthly payment is money leaving you. The same amount, sent to an investment instead of a lender, is a different sum. The SIP calculator projects a fixed monthly contribution forward. The compound interest calculator does the same for a lump sum. Neither one prices a loan. They answer the question the payment row raises: what else that monthly amount could have done.