What a loan really costs
Car loans, personal loans and most student loans are amortizing installment loans: you borrow a fixed amount, the rate is fixed, and you repay it in equal payments. Each payment first covers the interest charged since the last one, and the rest reduces the balance. Because the balance keeps falling, the interest part shrinks and the principal part grows over the life of the loan.
Three numbers decide the cost:
- Amount. Interest is charged on what you owe, so every dollar you don’t borrow saves its share of interest too.
- Rate. The annual rate is split across the payments: 8% a year with monthly payments is 0.6667% a month.
- Term. A longer term spreads the principal over more payments, so each one is smaller — but the balance stays higher for longer and collects interest for longer.
The comparison table under the calculator shows that trade-off directly: the same loan over two shorter and two longer terms, with the difference in total interest.
The loan payment formula
The level payment that repays a fixed-rate loan in exactly n payments is:
M = P × r ÷ (1 − (1 + r)⁻ⁿ)
- M
- payment per period
- P
- amount borrowed
- r
- rate per period: the annual rate as a decimal divided by payments per year (12, 26 or 52)
- n
- number of payments: the term in months × payments per year ÷ 12
At 0% the formula becomes M = P ÷ n. Total interest is everything you pay minus the amount borrowed:
Total interest = (M × n) − P
Dividing the annual rate by the number of payments in a year is the convention US lenders use when they disclose an annual percentage rate: under Regulation Z the APR is the rate per payment period multiplied by the number of periods in a year. The calculator rounds each payment and each month’s interest to the cent, like a lender’s statement, and lets the final payment absorb the leftover cents so the balance ends at exactly zero. That is why the last payment can differ slightly from the others.
Worked example: a $20,000 car loan
You borrow $20,000 at 8% for 5 years with monthly payments.
- Rate per month: 8% ÷ 12 = 0.6667%, so r = 0.00666667
- Number of payments: 5 × 12 = 60
- (1 + r)⁻⁶⁰ = 0.671210, so the divisor is 1 − 0.671210 = 0.328790
- Payment: $20,000 × 0.00666667 ÷ 0.328790 = $405.53 a month
- Total paid: 59 × $405.53 + a final $405.35 = $24,331.62, of which $4,331.62 is interest
How the term changes the picture for the same $20,000 at 8%:
| Term | Monthly payment | Total interest |
|---|---|---|
| 3 years | $626.73 | $2,562.15 |
| 4 years | $488.26 | $3,436.41 |
| 5 years | $405.53 | $4,331.62 |
| 6 years | $350.66 | $5,247.98 |
| 7 years | $311.72 | $6,184.96 |
Stretching the loan from 5 to 7 years lowers the payment by $93.81 a month but adds $1,853.34 of interest. Going down to 3 years costs $221.20 more a month and saves $1,769.47.
Before you sign
- Compare APRs, not just rates. The APR folds in certain finance charges such as origination fees, so it is the better number for comparing two offers. For the payment itself, use the interest rate on the loan agreement.
- Long terms can leave you owing more than the car is worth. A car loses value fastest in its first years, while a long loan repays principal slowly at the start.
- Interest may be charged daily. Some lenders work out interest on the balance each day, so paying a few days early or late moves the interest slightly away from this schedule.
- Paying early usually saves interest. Extra principal lowers the balance that interest is charged on. Check the agreement for a prepayment penalty first, and use the amortization calculator to see the effect payment by payment.
- Variable-rate loans (including some private student loans) will not follow this schedule once the rate changes.
Borrowing for a home?
Mortgage payments usually include property tax, insurance and sometimes PMI. The mortgage calculator adds those on top of principal and interest.
Frequently asked questions
Is a shorter or longer loan term better?
A shorter term costs less overall because the balance is repaid faster and collects less interest. A longer term gives a lower payment, which can matter for your monthly budget. The comparison table shows both sides for your own loan.
Do biweekly payments save interest?
A little, when the loan is set up for 26 payments a year: each payment is a little under half the monthly amount and the balance falls slightly sooner. On a $20,000 loan at 8% over 5 years, true biweekly payments cost $4,296.48 in interest against $4,331.62 with monthly payments. The big savings people mention come from paying half the monthly payment every two weeks on a monthly loan, which adds up to one extra monthly payment a year.
What is the difference between the interest rate and the APR?
The interest rate sets how much interest is charged on the balance. The APR is a yearly rate that also includes certain finance charges, such as origination fees, spread over the loan, so it is usually a bit higher. Use the APR to compare offers and the interest rate to work out the payment.
Why is the last payment different from the others?
Payments are rounded to the cent, so a level payment is never exact. The small difference builds up over the loan, and the final payment is adjusted up or down to bring the balance to exactly zero.
Can I use this for a student loan?
Yes, for a fixed-rate loan in repayment. It does not model deferment, interest that builds up while you are in school, or income-driven repayment plans, which set payments from your income rather than from the balance.
Sources
Last reviewed September 15, 2026