How this is calculated
The monthly payment comes from the amortisation formula: M = P × r × (1+r)ⁿ / ((1+r)ⁿ − 1), where P is the principal, r is the annual rate divided by twelve, and n is the number of months. Total of payments is M × n, and total interest is that figure minus the principal you borrowed.
Worked example on $20,000 at 6.5% over five years: the monthly rate is 0.0054167 and n is 60. The formula gives a payment of about $391.32. Over 60 months that is $23,479, of which $3,479 is interest — roughly 17% on top of what you borrowed.
Stretch the same loan to seven years and the payment drops to about $296 while total interest rises to around $4,880. You save $95 a month and pay $1,400 more overall. That trade is the entire decision, and it is why the total-interest row matters as much as the monthly one.
Why early payments are almost all interest
Interest each month is charged on the balance still outstanding, so it is largest at the start when you owe the most. On the $20,000 example, the first payment splits roughly $108 interest and $283 principal. By the final payment it is about $2 interest and $389 principal.
This is why an extra payment early in the loan is worth far more than the same payment later — it removes principal that would otherwise have accrued interest for the whole remaining term. It is also why refinancing late in a loan rarely helps much: by then you have already paid most of the interest.
What the calculator assumes
A fixed rate for the whole term, equal payments every month, and no fees. Real loans often add an origination fee, which is why the APR quoted on a loan agreement is usually higher than the nominal interest rate — APR folds fees into the rate so that offers can be compared honestly.
It also assumes no early repayment penalty. Some lenders charge one, which changes the maths on paying a loan off ahead of schedule. Check the agreement before assuming extra payments are free.
How to use the loan calculator
- Enter the loan amount. The principal you are borrowing, after any deposit or trade-in, and before fees rolled into the loan.
- Enter the annual interest rate. Use the nominal rate the lender quotes. If you have an APR that includes fees, use that instead for a more honest total.
- Set the term in years. Try more than one. Comparing the monthly payment against the total interest across two or three terms is the point of the exercise.