Loan Payments & Amortization — Complete Guide to Understanding Your Monthly Payment

A monthly loan payment is the fixed amount that repays the balance, with interest, in a set number of payments. The amortization schedule shows what that payment does each month: it pays the interest accrued first and applies the remainder to principal. This guide is the whole-loan view, from choosing the amount, rate and term to the final payment, using a $150,000 loan at 6% over 20 years as the worked example. Other posts go deeper on the formula, on reading each row, and on extra payments.

The three levers that set the payment

The payment depends on the amount borrowed, the interest rate and the number of payments. Amount scales it exactly: double the amount and the payment doubles. Rate and term do not scale it linearly. Here is the payment and the total interest for $150,000 across rates and terms. Assumptions: fixed rate, monthly payments, interest of one-twelfth of the annual rate on the balance, no fees. The rates are examples, not quotes.

Reading across a row: at 6%, stretching from 20 to 30 years lowers the payment by $175.32 a month but adds $65,842.10 of interest. Reading down a column: on 20 years, one extra point of rate adds $88.30 a month, from $1,074.65 to $1,162.95. A longer term buys a lower payment at the price of more interest, and the table shows that the price is steep.

The whole loan, from first payment to last

At 6% over 240 months the $150,000 loan has a payment of $1,074.65 and a total interest cost of $107,915.18, which is 72% of the amount borrowed. Selected rows of the schedule:

Principal first exceeds interest at payment 103. At the halfway mark the borrower has paid $128,958 in total (120 x $1,074.65) but still owes $96,797.13, 64.5% of the original balance. That slow start is the pattern of every amortized loan, and it is stronger as the term gets longer or the rate higher.

A quick way to size any loan at this rate and term

Because payment scales with the amount borrowed, you can price any loan at the same rate and term from one unit figure. At 6% over 20 years, each $1,000 borrowed costs $7.16 a month (7.1643 before rounding) and $719.43 in total interest. Multiply by 150 and you recover the $1,074.65 payment above; a $90,000 loan on the same terms would be about $644.79 a month. The shortcut stops working the moment the rate or term changes, so recompute the unit figure for each combination you compare.

What extra payments do to this loan

Extra money is applied to principal. $100 extra each month pays the loan off in 205 payments (17 years 1 month) instead of 240 and saves $18,285.65 of interest. $250 extra a month pays it off in 168 payments (14 years) and saves $36,107.09. The earlier it starts, the more it saves, and the detail is in the dedicated post on extra payments.

Before you sign a loan, check

1. The rate type: fixed, or adjustable and when it can reset.
2. The APR as well as the rate, because upfront fees raise the cost of borrowing without changing the payment.
3. The total interest over the full term, not only the payment.
4. Whether interest is calculated monthly or daily.
5. Whether extra payments are applied to principal and whether any prepayment fee applies.
6. What else is in the bill: tax and insurance escrow, insurance premiums or add-on products.

When this model does not apply

• Credit cards and lines of credit are revolving, with no fixed schedule.
• Interest-only and balloon loans do not reduce principal to zero through regular payments.
• Adjustable-rate loans recompute the payment when the rate changes, so any single schedule is only a forecast.
• Loans with irregular payment dates, grace periods or daily accrual will differ from the monthly model by small amounts.