Data Source and Calculation Methodology

This calculator uses the standard, universally accepted **annuity formula** for calculating amortizing loan payments. This is the same formula used by financial institutions worldwide for fixed-rate loans, including personal loans, auto loans, and mortgages.

All calculations are based strictly on the mathematical formulas provided below. This tool does not account for specific lender fees (like origination or late fees) unless you manually adjust the loan amount to include them.

The Formula Explained

To find the fixed monthly payment (M), we use the following formula, where $P$ is the principal loan amount, $r$ is the monthly interest rate, and $n$ is the total number of payments (months).

$$ M = P \frac{r(1+r)^n}{(1+r)^n - 1} $$

Once the monthly payment is known, the total cost and total interest are simple to calculate:

  • Total Cost = $M \times n$
  • Total Interest Paid = $(M \times n) - P$

Glossary of Terms

Loan Amount (P)
The initial amount of money you borrow from the lender, also known as the principal.
Annual Interest Rate (APR)
The yearly cost of your loan, including interest, expressed as a percentage. Our calculator converts this to a monthly rate ($r$) for the formula ($r = \text{APR} / 12$).
Loan Term (n)
The total amount of time you have to repay the loan, typically expressed in years or months. Our formula uses $n$, the total number of monthly payments (e.g., 5 years = 60 months).
Monthly Payment (M)
The fixed amount you will pay each month for the life of the loan. Each payment is a combination of both interest and principal.
Total Interest
The total amount of interest you will pay over the entire loan term. This represents the full cost of borrowing the money.

How It Works: A Step-by-Step Example

Let's say you want to take out an unsecured loan with the following terms:

  • Loan Amount (P): $10,000
  • Annual Interest Rate (APR): 5%
  • Loan Term: 5 years

First, we must convert the annual rate and term into monthly figures for the formula:

  1. Monthly Interest Rate (r): $5\% / 100 / 12 \text{ months} = 0.004167$
  2. Total Number of Payments (n): $5 \text{ years} \times 12 \text{ months/year} = 60 \text{ months}$

Now, we plug these values into the monthly payment formula:

$$ M = 10,000 \frac{0.004167(1+0.004167)^{60}}{(1+0.004167)^{60} - 1} $$ $$ M = 10,000 \frac{0.004167(1.28335...)}{(1.28335...) - 1} $$ $$ M = 10,000 \frac{0.005347...}{0.28335...} $$ $$ M = \$188.71 $$

Your fixed monthly payment would be $188.71.

  • Total Cost: $\$188.71 \times 60 = \$11,322.60$
  • Total Interest Paid: $\$11,322.60 - \$10,000 = \$1,322.60$

Frequently Asked Questions

What is an unsecured loan?

An unsecured loan, often called a personal loan, is a loan that does not require you to provide any collateral (like a house or car) to secure it. The lender approves the loan based on your creditworthiness, income, and financial history. Because it's riskier for the lender, unsecured loans typically have higher interest rates than secured loans (like mortgages).

What is APR (Annual Percentage Rate)?

The Annual Percentage Rate (APR) is the total cost of borrowing money over a year, expressed as a percentage. It includes the interest rate plus any additional fees or costs associated with the loan (like origination fees). APR gives you a more complete picture of the loan's cost than the interest rate alone.

How is this different from a secured loan?

A secured loan is "secured" by an asset you own, known as collateral. A mortgage is secured by your home, and an auto loan is secured by your car. If you default on a secured loan, the lender can seize the collateral. An unsecured loan has no collateral, so the lender's only recourse is typically through legal action or collections, which is why your credit score and income are so important for approval.

Can I pay off an unsecured loan early?

In most cases, yes. Making extra payments or paying a lump sum reduces your principal balance faster, which means you'll pay less total interest and pay off the loan sooner. However, you should always check with your lender to see if there are any 'prepayment penalties' for paying the loan off ahead of schedule.

How does my credit score affect my loan terms?

Your credit score is a primary factor lenders use to determine your eligibility and interest rate. A higher credit score signals to lenders that you are a low-risk borrower, which typically qualifies you for larger loan amounts and, most importantly, lower APRs. A lower credit score may result in a higher APR or loan denial.

Tool developed by Ugo Candido. Finance content reviewed by the CalcDomain Editorial Board.
Last accuracy review: