How to Calculate a Monthly Loan Payment (Formula + Example)

When you borrow money at a fixed rate, the lender turns the loan into equal monthly payments. Knowing how that payment is built helps you compare offers, spot expensive terms, and check a lender's numbers. Here is the full method, using a real example.

The formula

M = P × r ÷ (1 − (1 + r)⁻ⁿ)

M is the monthly payment.
P is the principal, the amount you borrow.
r is the monthly interest rate: the annual rate divided by 12, written as a decimal.
n is the total number of monthly payments.

Step-by-step example

Suppose you borrow $12,000 at 9% APR for 4 years.

Monthly rate: 9% ÷ 12 = 0.75%, or 0.0075 as a decimal.
Number of payments: 4 years × 12 = 48.
Growth factor: (1.0075)⁻⁴⁸ ≈ 0.6986.
Denominator: 1 − 0.6986 = 0.3014.
Numerator: 12,000 × 0.0075 = 90.
Payment: 90 ÷ 0.3014 ≈ $298.62 per month.

Over 48 months you will pay about $14,334 in total, which means roughly $2,334 goes to interest.

Where each payment goes

Interest is charged on what you still owe. In month one you owe the full $12,000, so the interest is 12,000 × 0.0075 = $90.00. The remaining $208.62 of your payment reduces the balance to $11,791.38. In month two the interest is calculated on that smaller balance: $88.44. Because the payment is fixed, the interest slice shrinks and the principal slice grows every month. This process is called amortization.

The spreadsheet shortcut

In Excel or Google Sheets, one function does all of this:

=PMT(9%/12, 48, -12000)

The three inputs are the monthly rate, the number of payments, and the loan amount (entered as a negative number so the payment comes out positive). The result is $298.62.

What changes the payment most

Interest rate. Even a one-point difference adds up over a long loan.
Term. Longer terms lower the payment but raise the total interest.
Amount borrowed. A bigger down payment or trade-in shrinks P directly.

Common mistakes

Using the annual rate as r instead of dividing by 12.
Mixing years and months, for example using n = 4 instead of 48.
Forgetting that fees, insurance and taxes may be added on top of the loan payment.

To skip the arithmetic, try the loan calculator, which also shows a year-by-year balance table.