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How to Calculate a Loan Payment (and the Total Cost of Borrowing)

By the ClearRate team · Updated November 2026 · 6-minute read

A loan’s monthly payment is the number everyone asks about, and the total cost is the number that matters most. They are not the same, and the gap between them can be thousands of dollars. This guide shows you the formula, works through a full example, and explains how the rate and the term change what you actually pay.

The formula, in plain English

A fixed-rate loan — the kind most small-business loans, equipment loans, and personal loans are — has the same payment every month until it is paid off. The payment is calculated with the amortization formula. If P is the amount you borrow, r is the monthly interest rate, and n is the number of monthly payments, then the monthly payment M is:

M = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)

To get r, divide the annual rate by 12. A 6.5 percent annual rate is 0.5417 percent a month, or 0.005417 as a decimal. To get n, multiply the years by 12: a 5-year loan is 60 payments. You do not need to do this by hand — the loan payment calculator does it instantly — but knowing the inputs tells you what to change when you compare loans. Only three things move the payment: the amount, the rate, and the term.

If the rate is zero, the formula simplifies to the loan amount divided by the number of payments. A $12,000 interest-free loan over 12 months is $1,000 a month. With any rate above zero, the payment is higher than that, and the difference is the interest.

Worked example: $25,000 at 6.5% for 5 years

Take a $25,000 business loan at 6.5 percent annual interest, repaid over 5 years.

1. Monthly rate: 6.5% ÷ 12 = 0.5417% (0.005417).
2. Number of payments: 5 × 12 = 60.
3. Monthly payment: about $489.15.
4. Total paid: $489.15 × 60 = about $29,349.
5. Total interest: $29,349 − $25,000 = about $4,349.

That last number is the one to focus on. You borrowed $25,000 and you pay back $29,349. The loan costs $4,349 — about 17 percent of the amount borrowed — spread over five years. Whether that is a good deal depends on what the loan buys. If it buys equipment that earns far more than $4,349 over five years, it is a good deal. If it buys something that earns nothing, it is $4,349 spent on nothing.

How the payment changes over time: amortization

The payment stays the same, but what it pays for changes every month. In the first month, the balance is $25,000, so the interest is $25,000 × 0.5417%, or about $135. Of your $489 payment, $135 is interest and $354 is principal. The balance falls to about $24,646. Next month, the interest is calculated on the smaller balance, so it is slightly less, and slightly more of your payment goes to principal. By the last month, the balance is a few hundred dollars, the interest is a few dollars, and almost the whole payment is principal.

Payment	Payment amount	Interest	Principal	Balance after
1	$489.15	$135.42	$353.73	$24,646.27
12	$489.15	$114.79	$374.36	$20,821.24
30	$489.15	$77.12	$412.03	$13,824.35
60	$489.15	$2.63	$486.52	$0.00

This pattern is why the first year of a loan feels slow. You have paid almost $5,870 in the first twelve months, but the balance has only fallen by about $4,180. The rest was interest. It is not a trick and it is not a mistake. It is how amortization works, and every fixed-rate loan works the same way.

How rate and term change the total cost

Use the same $25,000 loan to see the trade-offs. At 6.5 percent for 5 years, the payment is $489 a month and the total interest is $4,349. Stretch it to 7 years and the payment falls to about $371 a month — $118 less — but the total interest rises to about $6,190, roughly $1,840 more. Shorten it to 3 years and the payment rises to about $767 a month, while total interest falls to about $2,600.

Now change the rate instead of the term. At 5 years, raising the rate from 6.5 to 9 percent lifts the payment from $489 to about $519 a month and total interest from $4,349 to about $6,140. Dropping the rate to 4.5 percent cuts the payment to about $466 and total interest to about $2,960. A two-point difference in rate is worth about $1,400 on this loan — which is why comparing at least three lenders, with the same term, is worth an afternoon of your time. Ask each lender for the APR, not just the interest rate, because the APR includes most fees. Two loans with the same interest rate can have different APRs, and the lower APR is usually the cheaper loan.

Questions to ask before you sign

Is the rate fixed or variable? A fixed rate never changes, so the payment in this guide is the payment for the whole loan. A variable rate can rise, and the payment with it. If the rate is variable, ask what it is tied to, how often it can change, and how high it can go.

What fees are there? Origination fees, application fees, late fees, and prepayment penalties all add to the cost. A loan with a low rate and a large origination fee can cost more than a loan with a slightly higher rate and no fee. The APR is the best single number for comparing, but read the fee schedule too.

Can I pay extra? Extra payments go directly to principal if the loan allows them without penalty, and they cut both the term and the total interest. Even $50 extra a month on a $25,000 loan can save hundreds of dollars and cut months off the repayment. Ask whether extra payments are allowed, whether they are applied to principal, and whether there is a penalty for paying the loan off early.

What happens if I miss a payment? Know the late fee, the grace period, and whether a missed payment is reported to credit bureaus. A single missed payment can cost far more than the fee, in higher rates on future borrowing.

The bottom line

Calculate the monthly payment, then look past it to the total interest. Choose the shortest term whose payment you can afford comfortably in a slow month, not just a good one. Compare APRs across at least three lenders, ask about fees and extra payments, and read the agreement before you sign. A loan is a tool: used for something that earns more than it costs, it is a good tool. Used for anything else, it is an expensive one.