Loan Payment Calculator

Borrow $40,000 at 8.5% for 60 months. The monthly rate is 8.5% ÷ 12 = 0.7083%, and the payment formula gives roughly $820.61 a month. Over 60 payments you send about $49,237, so the loan costs about $9,237 in interest — a bit over 23% of what you borrowed, on a rate that reads as 8.5%.

Look at the first payment. Interest is $40,000 × 0.7083% = $283.33, so only $537.28 goes to principal and the balance drops to $39,462.72. By the final payment, interest is a few dollars and nearly the whole $820.61 retires principal. That front-loading is why paying off a loan in year four saves far less than a quarter of the total interest — most of it has already been paid.

Now add $100 a month. Payment becomes $920.61, the balance clears in about 53 months instead of 60, and total interest falls to roughly $7,990. Roughly $1,250 saved and seven months off the term, from $100 that was never a large sum in any single month. The mechanism is simple: every extra dollar reduces the balance immediately, so all future interest is charged on a smaller number.

This calculator models an amortising loan, where each payment retires part of the principal and the balance reaches zero at the end of the term. Some business financing is interest-only for a period: you pay only the interest charge each month and the principal is untouched until a balloon payment or a refinance at the end. On that $40,000 at 8.5%, an interest-only payment is $283.33 a month — attractive against $820.61 until you remember you still owe the full $40,000 when the period ends.

If your loan has an interest-only phase followed by an amortising phase, model the second phase separately using the balance and the remaining months, because the payment during that phase is much higher than a payment calculated over the original full term.

Variable-rate loans are also outside this model. The formula assumes the rate is fixed for the entire term; if your rate resets, the output is valid only until the first reset, and re-running it with the new rate and remaining term gives you the next segment.

Entering the annual rate where a monthly rate belongs, or vice versa. Dividing 8.5 by 12 outside the calculator and typing 0.708 as the annual rate produces a payment so low it looks like a bargain. Enter the rate as your lender quotes it and let the tool do the conversion.

Confusing the interest rate with the APR. APR is designed to fold origination fees and certain charges into a single comparable figure. Feed the APR into the payment formula and the payment comes out slightly high; feed the plain rate and the true cost of the loan comes out low, because the fees are missing. For an honest picture, model the payment at the note rate and add the fees to your total cost separately.

Assuming an extra payment is automatically applied to principal. Many lenders default an overpayment to the next scheduled instalment, which advances your due date but saves almost no interest. It must be explicitly designated as a principal reduction to work as modelled here — and some loans carry prepayment penalties that erase the benefit entirely.

Comparing two loans on monthly payment alone. A longer term always looks cheaper monthly and is almost always more expensive in total. Compare total interest and total repaid, then decide whether the cash-flow relief is worth the premium.

The amortisation table is the most useful part of the output, because it shows where you stand at any point rather than only where you finish. Two things to look for: the month at which principal first exceeds interest in a single payment — the crossover point, which arrives late on long terms — and the outstanding balance at any date you might want to sell the asset or refinance.

The balance figure is the one that surprises people. On a long term, the balance after several years of faithful payments can still be close to the original amount, which matters enormously if the asset securing the loan has depreciated. If the balance exceeds the resale value, you cannot sell without writing a cheque.

A good result is not simply a low payment. It is a payment your cash flow absorbs in a bad month, with total interest you would accept if you saw it as a single invoice, on a term no longer than the useful life of whatever the money bought. Borrowing over seven years for equipment that lasts four is a structural mistake no rate can fix.

Origination fees, arrangement fees, broker commissions, insurance required as a condition of the loan, late charges, and any prepayment penalty are all outside the calculation. On a small business loan these can be a meaningful share of the borrowed amount and they usually come out of the disbursement, so you receive less than the principal you are paying interest on.

Taxes and escrow are also excluded, which matters most for property loans where the actual monthly outflow includes property tax and insurance alongside principal and interest. If you are pricing a home purchase, use a mortgage calculation that carries those components; if you are financing equipment or working capital, a business loan model that accounts for fee structures will be closer to reality than the bare formula.