How to calculate loan instalment? Formula and calculator

Introduction

Calculating your loan instalment helps you see how much you will pay each month and what the total cost will be. Banks usually use an annuity (fixed) instalment. This article shows the loan instalment formula and explains the difference between fixed and decreasing instalments.

Annuity instalment formula

Fixed monthly instalment: Instalment = K × [r × (1+r)^n] / [(1+r)^n − 1]. K — loan amount, r — monthly interest rate (annual/12), n — number of instalments. This is the PMT formula. Example: 200,000 PLN over 10 years at 6% per year gives r ≈ 0.005 and an instalment of about 2,220 PLN.

Decreasing instalment

With a decreasing instalment you pay a fixed part of the principal each month plus interest on the remaining balance. The first instalment is higher than with an annuity; total interest is lower.

Comparison

Fixed instalment: same amount each month, more interest in total. Decreasing instalment: amount decreases, less interest in total.

Change of instalment during the loan

With a variable rate (e.g. WIBOR + margin) a change in the rate leads to recalculation of instalments. A "fixed" instalment means a fixed method of calculation, not that it never changes.

How to check total cost

Sum of instalments = number of instalments × instalment. The difference between the sum of instalments and the principal is interest. A loan calculator or APR from the bank helps compare offers.

Summary

The annuity instalment is calculated with the PMT formula. A decreasing instalment gives lower total interest with higher initial instalments. Use a loan calculator or the PMT function in a spreadsheet to calculate.