About This Tool
Taking out a loan is a significant financial commitment, and understanding the true cost of borrowing is essential for financial health. Whether you are financing a car, consolidating debt, or taking out a personal loan, the interest rate and term length dramatically affect how much you pay back. A lower monthly payment often means paying significantly more in interest over the life of the loan. This Loan Calculator helps you visualize these trade-offs. By inputting your loan amount, interest rate, and term, you can see your exact monthly payment and total interest cost. It also features an "Extra Payment" tool, showing you exactly how much time and money you can save by paying just a little more each month.
How Loan Amortization Works
Amortization is the process of paying off a debt over time with regular payments. While your total monthly payment remains the same (for fixed-rate loans), the portion that goes towards interest versus principal changes every month.
- Early in the loan: A large percentage of your payment goes to interest. The bank gets paid first.
- Later in the loan: As your principal balance decreases, less interest accrues, so more of your payment goes towards reducing the debt.
This is why making extra payments early in the loan term is so powerful. By reducing the principal balance sooner, you prevent interest from accruing on that amount for the rest of the loan term.
The Power of Extra Payments
Paying more than the minimum due is one of the best guaranteed returns on investment you can get. If your loan interest rate is 6%, every extra dollar you pay toward the principal earns you a guaranteed 6% return by saving you that future interest cost.
Example: On a $20,000 car loan at 8% for 5 years:
- Standard Payment: $405/month. Total Interest: $4,331.
- +$50 Extra/Month: You pay it off 7 months early and save over $600 in interest.
- +$100 Extra/Month: You pay it off 13 months early and save over $1,100 in interest.
Use the "Extra Monthly Payment" field in the calculator to test different scenarios and see how quickly you can become debt-free.
Common Loan Types
This calculator is versatile and can be used for various types of financing:
- Personal Loans: Typically unsecured loans for debt consolidation, home improvements, or major purchases. Rates vary widely based on credit score.
- Auto Loans: Secured by the vehicle. Terms usually range from 36 to 72 months. Longer terms lower the monthly payment but increase total interest significantly.
- Small Business Loans: Term loans for equipment or working capital. Often have shorter terms and specific repayment structures.
Note: For mortgages, which often include taxes and insurance in the payment (PITI), consider using a dedicated Mortgage Calculator, as this tool calculates principal and interest only.