How to Calculate Payments on a Personal Loan

If you're thinking about getting a personal loan, the first thing you should do is figure out if you can afford the monthly payments. Lenders calculate the interest on these types of loans using the simple interest method. That means the interest is a fixed percentage of the amount borrowed. To calculate the payment of a personal loan, let's assume you're borrowing $2400 at a rate of 12 percent interest and will repay it over 3 years.

Instructions

1. Calculate the total amount of interest by multiplying the amount you borrow, known as the principal, by the interest rate and then by the loan term in years. In this case, we would have $2400 x .12 x 3 to get a total of $864 in interest.

2. Add the amount of interest to the loan principal to calculate the total amount of repayment. That would be $2400 + $864 = $3264.

3. Convert the loan term to months by multiplying the number of years by twelve. Our example would use 3 x 12 to get 36 months.

4. Divide the total amount of repayment by the number of months to calculate the monthly loan payment. Our example would use $3264 divided by 36 to get $90.66 per month.

Tips & Warnings

• Use this same calculation to figure out what the payment would be if paid back in 2 or 4 years. Then determine which payment best fits your budget. Though the payment may be higher using a shorter loan term, you will save a bundle in interest.

• Since interest rates are expressed as annual percentage rates, you should always start the interest calculation using the number of years rather than number of months.