Loan Payment Calculator
Calculate monthly payments, total interest, and amortization for business loans.
Formula
Monthly Payment (M) = P × [r(1+r)^n] / [(1+r)^n − 1] where P = principal, r = monthly interest rate, n = total number of payments
How to Calculate
The standard loan payment formula calculates a fixed monthly payment that covers both principal and interest over the loan term. The monthly interest rate (r) is the annual rate divided by 12. The total number of payments (n) is the loan term in years multiplied by 12.
Plug these values into the amortization formula: multiply the principal by the monthly rate times (1 + monthly rate) raised to the power of total payments, then divide by (1 + monthly rate) raised to the power of total payments minus 1. This gives the fixed monthly payment.
To understand the total cost of the loan, multiply the monthly payment by the total number of payments to get the total amount paid. Subtract the original principal to find the total interest cost. In the early years, most of each payment goes toward interest; in later years, the balance shifts toward principal repayment. This is called amortization.
Worked Example
A small business takes a $100,000 loan at 7.5% annual interest for 5 years.
P = $100,000 r = 7.5% / 12 = 0.625% = 0.00625 n = 5 × 12 = 60 payments
M = $100,000 × [0.00625 × (1.00625)^60] / [(1.00625)^60 − 1] M = $100,000 × [0.00625 × 1.4533] / [1.4533 − 1] M = $100,000 × 0.009083 / 0.4533 M = $100,000 × 0.02003 M = $2,003/month
Total paid: $2,003 × 60 = $120,180 Total interest: $120,180 − $100,000 = $20,180
Why It Matters
Understanding loan math prevents costly surprises and helps you compare financing options. A seemingly small interest rate difference has a significant impact over the life of a loan. Knowing your exact monthly payment lets you project cash flow, and understanding amortization helps you decide whether early payoff or refinancing makes sense.
Practical Tips
- ✓Compare the total interest cost, not just monthly payments, when evaluating loan options.
- ✓Ask about prepayment penalties before signing—some loans charge fees for early payoff.
- ✓Consider the total cost of capital including origination fees, which increase the effective interest rate (APR).
- ✓Shorter loan terms mean higher payments but significantly less total interest.
Frequently Asked Questions
What is the difference between interest rate and APR?
Should I choose a shorter or longer loan term?
What types of business loans are available?
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