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Home > How to Calculate Installments Loans

How to Calculate Installments Loans

If you’re considering securing an installment loan, knowing how to calculate your monthly payments and costs associated with your loan can help you choose the best possible loan for your finances and budgeting. 

Knowing what your monthly loan payment will be helps you determine which loan amount and loan terms fit your personal finances best. Once you know the formula for calculating monthly payments for installment loans, you can use it for any type of loan, whether it’s a personal loan, an auto loan, or a mortgage.

In this guide, we’ll explain how installment loans work, what types of installment loans there are, how to calculate the amount and number of payments, and what additional considerations you should take into account when securing an installment loan.

How to Calculate Installments Loans

Understanding Installments Loans

Installment loans are loans that involve borrowing a lump sum of money and repaying it in smaller increments over time; either monthly installments or loan payments. These types of loans usually involve larger amounts of money and longer loan terms, with more favorable interest rates and repayment terms compared to credit cards and payday loans. 

They’re used to cover various types of expenses, from financial emergencies like employment termination or unforeseen medical expenses to debt consolidation, vehicle repair, home improvement, or relocation. 

There are several different types of installment loans available (and we’ll cover them in the later section of this guide), but nearly all work as typical personal installment loans in which you borrow money from the lender and pay it back in monthly installments, including the loan principal amount and loan interest rates

It’s also worth mentioning that some lenders offer installment loans to borrowers with bad credit scores. However, these usually come with certain requirements and restrictions, such as more stringent repayment terms, higher interest rates, and perhaps additional fees, like origination fees and prepayment penalties. 

No matter the case, making timely payments and repaying the installment loan in a timely manner will have a positive impact on the borrower’s credit score, which could help them secure a loan with more favorable terms in the future. 

Different Types of Loans

There are several types of installment loans, and they’re mostly split into three categories, depending on their structure: fixed-rate loans, variable-rate loans (also known as adjustable-rate loans), and amortizing loans. Choosing the right type mostly depends on your financial and credit situation. Below is the breakdown of each type of loan. 

Fixed-Rate Loans

As their name implies, fixed-rate loans have a fixed interest rate that remains constant throughout the entire life of the loan, and its predictability makes it easier for borrowers to budget, as their loan repayment installments remain the same from the moment they secured the loan, to the moment they’re repaid. 

The stability they provide in terms of payment eliminates the risk of rising monthly interest rates that could potentially affect the cost of the loan. It’s often used in long-term loans, such as mortgages, lines of credit, home equity loans (HELOCs), and student loans. 

Variable-Rate Loans (Adjustable-Rate Loans)

These loans are characterized by the variable interest rate, which varies as market interest rates change, depending on an underlying benchmark or index, such as the federal funds rate. As a result, monthly installments on the outstanding balance are going to vary depending on the change in internet rates. 

While they sound unreliable, variable-rate (VR) loans do have their advantages, such as better upfront perks and generally lower interest rates compared to fixed loans. However, there are also drawbacks, since VR loans can become more expensive if interest rates rise quickly, and borrowers can’t really plan or forecast future cash flow due to changing rates. 

Just like with fixed-rate loans, variable-rate loans are often used for mortgages, credit cards, and some private student loans. 

Amortizing Loans

Amortizing loans feature installments that are specifically calculated according to an amortization schedule. The defining characteristic of an amortized loan is that it first pays off the relevant interest for that particular period, with the remainder of the payment being put towards reducing the principal amount. 

The interest is calculated based on the most recent ending balance of the loan, with the interest amount decreasing with every subsequent loan payment. This happens because any payment in excess of the interest only reduces the principal, which then reduces the balance used to calculate the interest for the subsequent payment. 

However, due to their inverse relationship, as the interest portion of the monthly installment decreases, the principal portion increases. 

How to Calculate Installment Loans

Knowing how to calculate your monthly installment allows you to budget more efficiently, ensuring that you have enough set aside to comply with your repayment obligations. However, before we dive into the mathematics, let’s familiarize ourselves with the basic terms: 

  • Principal amount (a): The total principal amount is the initial sum of money you borrowed and received from the lender and are now obligated to repay. 
  • Interest rate (r): The interest rate is the amount the lender charges for lending you money. It’s often calculated as the percentage of the total principal amount, and it’s affected by several different factors, including your credit score; a good credit score will secure more favorable interest rates. 
  • Loan term (n): Loan term is the duration over which you’ll repay the loan, and it’s typically measured in years. For the purpose of this guide, we’ll represent the total number of payments you have to make to clear the plan, which corresponds to the number of months in your loan term.
  • Monthly installment (P): The monthly installment is the fixed amount you must pay each month to repay the loan within a specified term. 

Now that we’re acquainted with the fundamentals let’s talk about calculations.

Calculating Fixed-Interest Installments

To calculate the monthly payment amount for fixed-interest loans, you can use the payment formula: 

  • P=(a×r)/((​1-(1+r)^(-n))

Though this may seem confusing, it’s actually rather simple. Assuming you want to secure a loan of $200,000, with a 3% interest, on a 10-year (120 months) loan term, start by calculating the monthly interest rate: 

  • r=3%/12 => r=0.03/12 => r=0.0025

Now, plug the rest of the values into the provided formula: 

  • P=(200,000×0.0025)/((1-(1+0.0025)^(-120)) 

This equals: 

  • P=500/((1-0.74109) => P=500/0.25890 => P=1931.21

Your monthly installment for a fixed-installment loan is $1,931.21 a month. 

Calculating Amortized Loan Installments

To calculate the monthly payment amount for amortizing loans, use the formula below: 

  • P=a×((r×(1+r)^(n))/((​(1+r)^(n))-1)

Using the previous example, the calculation confirms that your monthly installment would be approximately $1,931.21. Each payment, including both the principal and the interest, would be spread evenly across the loan term to fully amortize the loan. 

You may wonder where the difference is between the two calculations. Let’s say you’ve already repaid three installments at the previously established amount and decided to repay the fourth installment at $2,500 and run the calculation again. 

In that case, the remaining principal would be approximately $193,684.87, and according to the formula provided above, your new monthly installments would be approximately $1,925.56 for the remaining 116 months of the loan term. Continuing this repayment trend can help you reduce the principal significantly, which helps you save up on interest costs during the duration of the loan. 

Additional Considerations

Calculating your loan installments helps you understand your financial obligations better, but there are also several other things you have to consider: 

  • Fees and charges: Some lenders impose various fees and charges, such as prepayment penalties, late payment penalties, origination fees, and processing fees. These can affect the overall cost of the loan, so it’s really important to account for them as well. 
  • Prepayment options: Some lenders encourage their borrowers to repay the loan earlier and as fast as possible by eliminating prepayment penalties. This can help you save on interest costs. 
  • Credit score: Your credit score reflects your financial history and your creditworthiness. The better the score, the more favorable interest rates and loan terms you’ll be able to secure. 
  • Loan amortization schedule: This schedule provides you with a detailed breakdown of each monthly installment. Review this schedule using the formula we provided, as it can help you with your loan repayment progress. 
  • Loan refinancing: In some cases, you might be able to secure a more favorable loan to refinance the one you already have, which can lower your monthly installment.


If you’re looking for installment loans with favorable interest and terms, don’t hesitate to contact us. We’ll connect you with reputable third-party lenders and financial institutions without inquiring about the nature of your financing. Our inquiry form is available 24/7, allowing you to inquire about installment loans and other loan products regardless of whether it’s day or night, weekday or weekend. Online inquiry takes minutes to fill out and contains no hidden fees or charges.

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