How to Calculate Your Monthly Payments (Simple Estimate Formula)

You know your interest rate, the number of months it takes to pay off the loan, and how much money the loan is for, but all you really want to know is "What will my monthly payment be?" The simple formula below gives a good upper estimate on the amount of your monthly payment. The actual formula used by banks is slightly more complicated than the one described below. Use the formula below if you don't have access to a mortgage calculator.

Things You'll Need

• interest rate 'r'
• number of months 'm'
• amount, or principal 'p'
• calculator

Instructions

1. Let's say you take out a 3-year (36 month) loan at 5% interest. (5% is the same thing as .05) Take the number .05 and multiply it by 3 to get .15 Add 1 to get 1.15

2. Let's say that the principal is $12,000. Multiply 12000 times 1.15 to get 13800. That is approximately how much money you will actually be paying. Notice that it is more than the principal. That extra money is called interest.

3. Take the number 13800 and divide by the total number of months. 13800 divided by 36 is 383. So your monthly payment on this loan will be somewhat less than $383 every month for three years.

4. Banks use a slightly more complicated formula based on something called the 'time value of money.' The bank formulas will give you a lower number, so your actual monthly payment will be lower than the number you calculate above.

   However, the formula above is accurate if you use small interest rates and short loan periods, such for auto loans.

Tips & Warnings

• Use the formula above to estimate monthly payments on a car, since those usually have a lower principal, interest rate, and length of time.

• See the follow up article "How to calculate your monthly payments (part 2 complex)" for the precise calculation.

Resources

• How to Calculate Your Monthly Payments (Bank Formula)