How loan payments are calculated

A practical explanation of principal, interest, repayment term and the assumptions behind a standard loan-payment estimate.

What a loan payment represents

A typical amortizing loan payment contains an interest component and an amount that reduces the outstanding principal. Early in a long repayment schedule, a larger share of the payment can go toward interest because the balance is still relatively high.

The basic inputs

The FreeTools Hub loan calculator uses the amount borrowed, annual interest rate and repayment term. The annual rate is converted to a periodic rate and the term is converted to the number of payment periods.

Why the term matters

A longer term spreads repayment over more periods. That can reduce the required payment per period, but interest has more time to accumulate. Comparing both the periodic payment and the total interest gives a fuller picture than looking at the payment alone.

Try it

Use the Loan Calculator with two or three different terms and rates. Treat the outputs as estimates rather than lender quotes.