A personal loan calculator shows you the monthly payment and total interest you'll pay over the life of the loan. Understanding this helps you compare loan offers and decide if a loan is affordable.
The Loan Amortization Formula
Monthly Payment = P x [r(1+r)^n] / [(1+r)^n - 1], where P is the principal, r is the monthly interest rate (annual rate / 12 / 100), and n is the number of months.
Example: Borrow 50,000 at 6% annual interest for 3 years (36 months). Monthly rate = 6% / 12 = 0.5%. Monthly payment = 50,000 x [0.005(1.005)^36] / [(1.005)^36 - 1] = 1,518.77.
What Total Interest Tells You
Total Interest = (Monthly Payment x Number of Months) - Principal. In the example above: (1,518.77 x 36) - 50,000 = 4,675.72. This is the actual cost of borrowing, not just the rate percentage.
Comparing Loan Offers
- Loan A: 40,000 at 5% for 5 years = $943.50/month, $16,610 total interest
- Loan B: 40,000 at 7% for 3 years = $1,247.50/month, $4,910 total interest
- Loan C: 40,000 at 4% for 5 years = $920.14/month, $15,208 total interest
Lower rate doesn't always mean lower total cost. A shorter term at a higher rate can save you more in interest.
Additional Costs to Consider
- Origination fees: Often 1-3% of the loan amount
- Prepayment penalties: Some loans charge for early repayment
- Late fees: Daily or fixed penalty for missed payments
- Credit insurance: Mandatory in some jurisdictions
Always ask for the total cost of borrowing, not just the interest rate. This includes all fees and penalties.