Which interest rate should you enter?
Enter the loan’s nominal annual interest rate, rather than a fee-inclusive APR. This calculator divides that rate by the number of payments per model year. If your offer only shows APR, ask the lender for the interest rate used to calculate the loan payments.
Interest rate and APR answer different questions
The interest rate describes the charge for borrowing the principal. APR includes interest and certain additional loan charges, such as origination fees, in an annual percentage. It can help you compare borrowing costs, but it is not automatically the rate to put into a payment formula. The CFPB explains the difference between interest rate and APR.
For example, an offer with 6% interest and a higher APR because of fees still needs its 6% interest rate for this model. Fees are outside the calculation. Do not subtract fees from APR or treat the calculator’s total as the full cost of that offer.
Follow one payment from interest to balance
For $10,000 at a nominal 6% over five years with monthly payments, the period rate is 6% ÷ 12 = 0.5%. Payments occur at the end of each model period. With no extra payments:
| Result | Amount |
|---|---|
| Regular monthly payment | $193.33 |
| First payment’s interest | $50.00 |
| First payment’s principal | $143.33 |
| Balance after first payment | $9,856.67 |
| Final payment, number 60 | $193.21 |
| Total interest | $1,599.68 |
| Total paid | $11,599.68 |
The regular payment is rounded half-up to cents once. Each period’s interest is calculated from the opening cent balance and rounded the same way. The final payment clears what remains. Here, 59 × $193.33 + $193.21 = $11,599.68. Multiplying the regular payment by 60 would miss the final adjustment.
This interest/principal/balance sequence is the basis of an amortization schedule. Mathematics of Finance: loan amortization explains the formula and schedule relationships. The amounts above use this tool’s own rounding convention.
Payment frequency also changes the model rate
The calculator uses the same frequency for interest and payments: yearly (1), quarterly (4), monthly (12), twice a month (24), every two weeks (26) or weekly (52). Twice a month and every two weeks are different choices. There are no actual payment dates or day counts.
A nominal 6% divided into 12 periods has an effective annual model rate of about 6.167781%: (1 + 0.06 ÷ 12)12 − 1. With 52 periods, it is about 6.179982%. These are compounding comparisons, not statutory APR calculations.
On the same $10,000, five-year example, the weekly model has a $44.54 regular payment and $1,580.72 total interest across 260 payments. A smaller payment made more often is not by itself a saving. Compare total interest, total paid and model duration, and check the lender’s actual conventions before using a frequency comparison.
What the estimate leaves out
The model assumes a new, fixed-rate loan. It does not include fees, daily interest, variable rates, taxes, insurance, escrow, payment holidays, penalties or precomputed interest. It cannot produce a lender’s payoff quote or calculate statutory APR. Lenders may apply different rounding or payment rules.
If you already have a loan, entering its current balance and a remaining term would calculate a new model payment; it would not preserve your existing contractual payment. Use the lender’s records for that question.
Next: see how extra payments reduce the model balance and interest.
Example and linked sources checked: . These examples explain the model; they are not a loan offer or a guarantee of a lender’s figures.