How to Calculate a Monthly Loan Payment

When you borrow money for a car, a home, or anything else, the lender usually asks you to pay it back in equal monthly installments. That fixed amount is often called an EMI, short for Equated Monthly Installment. Knowing how to calculate it yourself helps you compare offers, plan a budget, and understand exactly how much a loan really costs. This guide walks through the formula step by step and shows you a full worked example.

The Loan Payment Formula

The standard formula for a fixed-rate loan payment is:

EMI = P · r · (1 + r)^n / ((1 + r)^n − 1)

Each letter stands for one piece of your loan:

P is the principal, the amount you borrow.
r is the interest rate per month, written as a decimal.
n is the total number of monthly payments.

The two values people most often get wrong are r and n, so it is worth slowing down on those.

Finding the Monthly Rate and Number of Months

Lenders quote an annual interest rate, but the formula needs a monthly rate. Divide the annual rate by 12, then convert the percent to a decimal by dividing by 100. A 6% annual rate becomes 6 / 100 / 12, which equals 0.005 per month.

For the number of months, multiply the loan term in years by 12. A 5-year loan runs for 5 × 12 = 60 months.

A Worked Example

Suppose you borrow 20,000 dollars at a 6% annual rate for 5 years. Here are the inputs:

P = 20,000
r = 0.005 (that is 6% divided by 12)
n = 60 (that is 5 years times 12)

First, calculate (1 + r)^n. That is 1.005 raised to the 60th power, which comes to about 1.3489.

Now plug everything in:

Top of the fraction: 20,000 × 0.005 × 1.3489 = about 134.89.
Bottom of the fraction: 1.3489 − 1 = 0.3489.
Divide: 134.89 / 0.3489 = about 386.66.

Your monthly payment is roughly 386.66 dollars. Over 60 months you pay about 23,200 dollars in total, which means you pay around 3,200 dollars in interest on top of the original 20,000.

How Principal, Rate, and Term Change the Payment

Once you understand the formula, you can see how each input pulls the payment up or down.

Principal: Borrowing more raises the payment and the total interest in direct proportion. Doubling the principal roughly doubles both.
Interest rate: A higher rate raises the payment and sharply increases total interest, because interest compounds over every month of the loan.
Term: A longer term lowers the monthly payment because you spread the balance over more months, but it usually increases total interest since you owe money for longer. A shorter term does the opposite: higher payments, less interest overall.

This trade-off between the monthly term and the term is worth weighing carefully. A payment that fits your budget today may cost you far more over the life of the loan if the term is long.

Let a Calculator Do the Math

The formula is not hard, but raising a decimal to the 60th power by hand is tedious and easy to fumble. When you want a fast, accurate answer, or you want to test several rates and terms side by side, use our loan calculator. Enter the amount, the annual rate, and the term, and it returns your monthly payment and total interest instantly. Try adjusting one input at a time to see the effect for yourself, then use the numbers to compare real loan offers with confidence.