Loan Payment Calculator

How Loan Payments are Calculated

A loan payment is the periodic amount paid by a borrower to a lender to cover both principal reduction and interest charges. For a fixed-rate amortized loan, periodic payments are calculated using the standard annuity formula:

$$P_{\text{payment}} = L \frac{r (1+r)^n}{(1+r)^n - 1}$$

Where $L$ is the initial loan principal, $r$ is the periodic interest rate (annual rate divided by payment frequency), and $n$ is the total number of payment periods over the loan term.

Impact of Payment Frequency

Switching from monthly to bi-weekly or weekly payment schedules can reduce overall interest costs. Making payments more frequently slightly reduces the principal balance faster between payment intervals, resulting in overall interest savings.