The monthly loan payment formula
Where: M = monthly payment, P = principal loan amount, r = monthly interest rate (annual rate ÷ 12), n = total number of monthly payments (years × 12).
Worked example: $20,000 personal loan
Loan: $20,000 at 8.5% APR for 5 years
- Monthly rate r = 8.5% ÷ 12 = 0.7083%
- n = 60 months
- M = 20,000 × [0.007083 × (1.007083)^60] ÷ [(1.007083)^60 − 1]
- = 20,000 × [0.007083 × 1.5254] ÷ [1.5254 − 1]
- = 20,000 × 0.010805 ÷ 0.5254
- = 20,000 × 0.02056
- Monthly payment = $411.20
- Total paid = $411.20 × 60 = $24,672
- Total interest = $24,672 − $20,000 = $4,672
How loan term affects your monthly payment and total cost
For the same $20,000 at 8.5% APR:
- 3-year term: $633/month, total interest $2,788
- 5-year term: $411/month, total interest $4,672
- 7-year term: $314/month, total interest $6,376
Extending from 3 to 7 years reduces monthly payment by $319 (50%) but increases total interest paid by $3,588 (128%). There's always a trade-off between affordability now and cost over the full term.
Interest rate impact: the most important variable
For a $30,000 car loan over 60 months:
- At 5% APR: $566/month, $3,968 total interest
- At 8.5% APR: $617/month, $7,020 total interest
- At 12% APR: $667/month, $10,020 total interest
A 3.5% difference in interest rate costs an additional $3,052 over the life of the loan. This is why shopping between lenders — even for a few extra quotes — is financially worthwhile. A credit score improvement of 50–80 points can move you from a 12% rate to a 8.5% rate, saving thousands.
How extra payments accelerate payoff dramatically
On a $20,000 loan at 8.5% over 5 years ($411/month):
- Extra $50/month → pays off 5 months early, saves $371 in interest
- Extra $100/month → pays off 9 months early, saves $672 in interest
- Extra $200/month → pays off 16 months early, saves $1,142 in interest
The key insight: extra payments made early in the loan have dramatically more impact than the same payments made later, because you reduce the principal on which future interest accrues.
APR vs interest rate — what's the real cost?
The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate PLUS origination fees, mortgage insurance, and other lender costs. Always compare loans using APR, not just the stated interest rate. A loan advertised at "6% with a 2% origination fee" has an APR higher than 6% — lenders are legally required to disclose this in the US, UK, Canada, and Australia.
Types of loans and their typical rates (2025)
- Personal loans (US): 6–36% APR depending on credit score
- Auto loans (US): 5–15% depending on new/used and credit
- Student loans (US federal): 6.53–9.08% fixed for 2024-25
- Personal loans (UK): Representative APR 6–39.9%
- Personal loans (Australia): Comparison rate 6–20%