How it’s calculated
Fixed-rate loans use the standard amortization formula, which gives a payment that stays the same every month:
r = APR ÷ 12 ÷ 100 n = years × 12
payment = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
If APR is 0: payment = P ÷ n
payment = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
If APR is 0: payment = P ÷ n
Worked example
P = $25,000 APR = 7.5% term = 5 years
r = 0.00625 n = 60 (1 + r)^60 = 1.4533
payment = 25,000 × 0.00625 × 1.4533 ÷ 0.4533 = $500.95
Total paid = 500.95 × 60 = $30,057
Total interest = $5,057
r = 0.00625 n = 60 (1 + r)^60 = 1.4533
payment = 25,000 × 0.00625 × 1.4533 ÷ 0.4533 = $500.95
Total paid = 500.95 × 60 = $30,057
Total interest = $5,057
In the first month, $156.25 of the payment is interest and $344.70 reduces the balance. By the final year, interest falls to $237 for the whole year.
Before you sign
- Compare the total cost of the loan, not only the monthly payment.
- Get at least three quotes; a one-point lower APR on this example saves about $708.
- Ask whether there are origination fees or prepayment penalties.
