Understanding Your Monthly Payment Calculation
Whether it's for a mortgage, auto loan or personal loan, understanding how your monthly payment is calculated is essential to managing your budget. Our simulator uses the standard amortization formula used by all banks.
The Mathematical Formula for Loans
The calculation is based on three key elements: the amount borrowed (Principal), the annual interest rate (Rate) and the repayment period. The longer the term, the lower the monthly payment, but the higher the total interest cost.
M = P × [ r(1 + r)^n ] / [ (1 + r)^n - 1 ]
Frequently Asked Questions
A short term (10-15 years) means paying much less interest, but increases your monthly payments. A long term (20-25 years) lightens your monthly budget, but the final cost of the loan will be higher.
This simulator is based on a fixed rate, which is the case for most mortgages and personal loans. This means your monthly payment won't change from start to finish.
The total cost of a loan is calculated by multiplying the monthly payment by the number of months, then subtracting the borrowed amount. For example: $500/month over 20 years = $120,000. If you borrowed $80,000, the total interest cost is $40,000.
With a fixed rate, your monthly payment cannot be modified except through renegotiation or loan refinancing. However, you can make a partial early repayment to reduce either the term or the amount of your remaining payments.