How is loan interest calculated? Two loans worked through

Lenders charge interest on what you still owe. That is how loan interest is calculated on most loans, and mortgage interest is often calculated monthly: balance × annual rate ÷ 12. On a $300,000 mortgage at 6.99% over 30 years, the first payment of $1,993.89 is $1,747.50 interest and $246.39 principal. The balance is at its biggest in month one, so the interest is too, and little of the fixed payment is left for principal.

Many car and student loans, and some personal loans, also use simple interest, which is interest on the balance you still owe. Other loans use precomputed interest, fixed up front. Some lenders count simple interest by day rather than by month. The idea is the same, only the number of days in each period changes the split.

How to calculate interest on a loan, step by step

Here is how to calculate loan interest for one month by hand, on the mortgage above.

1. Divide the annual rate by 12 to get the monthly rate: 6.99% ÷ 12 = 0.5825% a month.
2. Multiply what you owe by the monthly rate. That is this month's interest: $300,000 × 0.5825% = $1,747.50.
3. Find the payment. A fixed payment that pays off the loan in 360 months comes from the standard amortization formula, payment = balance × r ÷ (1 − (1 + r)^−n), where r is the monthly rate as a decimal and n the number of payments. Here r = 0.005825 and n = 360, so the payment is $1,993.89. You do not have to work this out by hand. The principal-and-interest payment is on your Loan Estimate or statement, and what matters here is that it does not change.
4. Whatever is left after interest goes to principal: $1,993.89 − $1,747.50 = $246.39. You now owe $299,753.61.
5. Next month, repeat on the new balance: $299,753.61 × 0.5825% = $1,746.06 interest, $247.83 principal.

The payment stays the same, and the split moves a little toward principal every month.

We checked this arithmetic against the sample Loan Estimate the CFPB publishes: $162,000 at 3.875% for 30 years. With the same terms our calculator gives the same monthly principal and interest, $761.78, and $15,772.58 of principal paid in five years against the form's $15,773. The CFPB did not review our calculator. It published a sample, and we checked against it.

Payment by payment: a 30-year mortgage

$300,000 at 6.99% for 30 years, first payment February 1, 2027, interest figured by month. Fixed rate, payments on time, principal and interest only. Taxes, insurance, escrow and fees are not in these numbers.

Across your first 12 payments you pay $23,926.68 in principal and interest, and $20,873.41 of it, about 87%, goes to interest. Over the whole 30 years the interest comes to $417,804.33, more than the loan itself. The final payment is $3.93 higher because rounding every payment to the cent over 30 years leaves a small balance to settle.

Pay $200 more each month from the first payment and the same loan ends 7 years and 1 month sooner, with $116,368.26 less interest.

How does interest work on a car loan? Interest counted by day

The CFPB describes simple interest on an auto loan as interest figured on the outstanding balance "either on a daily or monthly basis." Some lenders say outright that they count it daily. Navy Federal does, for its personal loans. With daily interest, you pay more for 31 days than for 28 at the same balance and rate.

$30,000 at 7.5% for 60 months, loan issued January 1, 2027, first payment February 1, 2027:

By day, the February payment covers the 31 days of January: $30,000 × 7.5% × 31 ÷ 365 = $191.10. Calculating interest on a loan by day is plain simple interest, principal × rate × time, with time measured as a share of the year. The March payment covers only the 28 days of February, so less of it goes to interest. Over five years the total interest differs by less than a dollar between the two methods, but every single payment splits differently.

How do I check my own loan?

Start with your loan agreement, the note. It says how interest is counted and sometimes gives a daily (per-diem) amount. Then a quick check, if your rate has not changed: take the balance right after one payment, multiply by your annual rate and divide by 12. If that matches the interest in the next payment, your lender is probably counting by month. Confirm it in the terms. With daily counting, a 31-day month costs more than a 28-day one at the same balance and rate, and the dates your payments arrive matter too.

Why does my number differ from the lender's?

Usually because something is counted differently from the way you counted it: the first period, the days, the rounding, what else is in the payment, or which rate you used. In detail:

• The first period. If the loan starts mid-month, the first stretch is shorter or longer than a month. On a mortgage, the days before the first regular period are often paid at closing as prepaid interest. The CFPB sample Loan Estimate shows $17.44 a day for 15 days.
• By month or by day. See the car loan above.
• Rounding. Each payment is rounded to the cent, and the last one settles what is left.
• What else is in the payment. Property taxes and homeowners insurance are often paid through escrow, and mortgage insurance may be in your monthly bill as well. These change your total payment, not the principal-and-interest schedule shown here.
• Interest rate and APR. The schedule is built on the note rate. The APR adds fees to show the cost of credit as one yearly percentage, so it is not the rate to use in this check.

Why Path to Zero lets you choose how interest is counted

Lenders do not all count interest the same way. Many mortgages go by month, some car, student and personal loans by day. A calculator that uses a different method from your lender will split the payment differently, and you will think you got the arithmetic wrong. So in Path to Zero each loan has its own setting for the method: monthly (30/360), daily (actual/365) or daily (actual/actual). Pick the one in your note, and the schedule is built that way.

Questions people ask

What is loan amortization?

Paying down a loan through regular payments over time. With a fixed-rate loan like the one above, each payment covers that period's interest first, and the rest reduces the balance. So the interest part shrinks and the principal part grows.

How often is mortgage interest paid?

Monthly, as part of your mortgage payment. With a typical mortgage, each payment covers the interest for the month before it.

How do I calculate the interest paid on a loan?

Add up the interest column of the schedule for the payments you care about. On the mortgage above that is $20,873.41 for the first 12 payments and $417,804.33 over the whole 30 years.

How can I calculate simple interest online?

You do not need a special tool. Simple interest is principal × rate × time, and any calculator does the multiplication. For the car loan above, $30,000 × 7.5% × 31 ÷ 365 gives $191.10 for the first 31 days, which is the February interest in the daily column.

What happens if I pay an extra $200 a month on my 30-year mortgage?

On the mortgage above, $200 extra a month from the first payment ends it 7 years and 1 month sooner and saves $116,368.26 of interest. Whether to use extra money to shorten the term or to lower the payment is a separate question, and we worked it through on a UK mortgage in pounds, where the arithmetic is the same: mortgage overpayment: reduce the term or the monthly payment.

See the split for your own loan, and the day it ends. Describe your loan in Path to Zero, choose how your lender counts interest, and see every payment split into interest and principal, with your debt-free date on top. Path to Zero estimates a schedule from the terms you enter. Your lender's schedule may differ, and the app does not calculate APR.