Whether it's a car, a personal loan, or a mortgage, the monthly payment a lender quotes isn't magic — it comes from one standard formula. Understanding it means you can sanity-check any offer before signing.
The Formula
M = P × [r(1+r)n] / [(1+r)n − 1]
- M = monthly payment
- P = principal (the loan amount)
- r = monthly interest rate (annual rate ÷ 12)
- n = total number of monthly payments (loan term in years × 12)
This formula exists because a loan payment has to do two jobs at once every month: pay the interest accrued so far, and chip away at the principal — the formula is what balances those two so the loan is fully paid off in exactly the term you agreed to.
Worked Example
A loan of 1,000,000 at 12% annual interest over 5 years: r = 0.12/12 = 0.01, n = 60 months. Running the formula gives a monthly payment of roughly 22,244. Over 60 months that's about 1,334,640 total — meaning roughly 334,640 is interest.
Skip the Manual Math
The Loan Calculator runs this instantly — enter the loan amount, interest rate, and term, and get the monthly payment along with the total interest paid over the life of the loan.
Why the Same Loan Amount Can Have Very Different Payments
- Longer terms lower the monthly payment but increase total interest paid — stretching a loan over more years always costs more overall for the same rate.
- A slightly lower interest rate matters more than it looks. On a large loan, even a 1% rate difference can mean a meaningfully different monthly payment.
- Extra payments toward principal reduce total interest more than they seem to, because every rupee/dollar paid early stops accruing interest for the rest of the term.
FAQ
Does this formula work for mortgages too?
Yes — mortgages, car loans, and personal loans with a fixed rate and fixed term all use this same amortization formula.
What if the interest rate is variable?
This formula assumes a fixed rate for the full term. A variable-rate loan's payment recalculates whenever the rate changes.
Why does my bank's quoted payment differ slightly from the formula?
Small differences usually come from fees, insurance, or rounding conventions bundled into the quote — the formula alone gives the pure principal-and-interest payment.