Finance
How to Calculate Loan Payments: The Math Behind Amortization
Just ask and get Editorial Team(Financial Planning & Economics)
Updated 2026-09-19
7 min read
Key Takeaway:Deconstruct monthly loan amortization payments, showing how principal and interest shares shift over time.
The Amortization Equation
$$M = P \times \frac{r(1 + r)^n}{(1 + r)^n - 1}$$
Where M is your monthly payment, P is the loan principal, r is the monthly interest rate, and n is total monthly payments.
The Shift Between Interest and Principal
In early payments, a large portion of each installment pays off accrued interest. As the principal drops, monthly interest decreases, accelerating principal reduction in later years.
Frequently Asked Questions
How do extra payments shorten a loan?
Extra payments apply directly to principal balance, permanently eliminating future interest charges across all remaining months.