Loan Calculator: 2026 Payoff & Interest Savings Engine
Calculate monthly payments for any loan. How to calculate loan payment; model extra payments for interest savings. Compare compounding frequencies. Trusted by borrowers. No sign-upโall calculations run locally.
Understanding Loan Structure
Standard Amortized Loans
- Payment Formula:M = P [r(1+r)^n] / [(1+r)^n - 1], where P is principal, r is monthly rate, n is number of payments
- Front-Loaded Interest:Early payments are mostly interest; later payments are mostly principal
- Example:A $200,000 mortgage at 6.5% for 30 years has a $1,264 monthly payment, with $1,083 going to interest in month 1
Standard amortized loans spread principal and interest payments evenly over the loan term. Each payment includes both principal and interest, with interest decreasing and principal increasing over time.
The amortization schedule shows exactly how each payment is allocated between principal and interest, helping you understand the true cost structure.
Deferred Payment Loans
- Structure:No monthly payments; full balance due at maturity
- Interest Calculation:A = P(1 + r/n)^(nt), where interest compounds over the deferral period
- Common Uses:Student loans, some business loans, zero-coupon bonds
- Cost Impact:Typically more expensive than standard loans due to compound interest accumulation without principal reduction
Deferred payment loans allow you to delay all payments until maturity. Interest compounds during the deferral period, resulting in a lump-sum payment of principal plus accumulated interest.
Bond-Style Loans (Predetermined Maturity)
- Structure:Fixed maturity value; payments calculated to reach that value
- Payment Calculation:Payments are determined to ensure the maturity value is reached by term end
- Common Uses:Savings bonds, zero-coupon bonds, certain investment products
Bond-style loans have a fixed maturity value higher than the principal. Regular payments accumulate toward this maturity value, similar to zero-coupon bonds.
The Power of Payment Acceleration
Extra Monthly Payments
- Impact Example:Adding $200/month to a $200,000 mortgage at 6.5% saves $50,000+ in interest and cuts 6-8 years off the term
- Best Timing:Extra payments are most effective early in the loan when interest charges are highest
- ROI Calculation:Each extra dollar reduces future interest, creating a compounding benefit that accelerates payoff
Adding even small extra payments to your monthly loan payment can dramatically reduce total interest and shorten the loan term.
The acceleration benefit compounds over timeโearly extra payments save more because they reduce the balance that compounds over many more months.
One-Time Payments
- Strategic Timing:One-time payments in months 12-24 have the highest impact
- Example:A $5,000 payment in month 12 saves more than the same payment in month 120
- Use Cases:Tax refunds, bonuses, inheritance, or other windfalls
Making a one-time payment at a specific month can provide significant interest savings, especially if made early in the loan term.
APR vs. APY: Understanding True Cost
The Compounding Effect
- APR:Nominal interest rate (what you're told)
- APY:Effective interest rate (what you actually pay)
- Formula:APY = (1 + APR/n)^n - 1, where n is compounding periods per year
- Example:6% APR with monthly compounding = 6.17% APY; with daily compounding = 6.18% APY
APR (Annual Percentage Rate) is the nominal rate you're quoted. APY (Annual Percentage Yield) is the effective rate after accounting for compounding frequency.
Always check the APY to understand your true borrowing cost. Credit cards with daily compounding can have significantly higher APY than their quoted APR.
Compounding Frequency Impact
- Daily Compounding:Highest APY (common in credit cards)
- Monthly Compounding:Standard for mortgages and most loans
- Quarterly Compounding:Less common, typically in business loans
- Annual Compounding:Lowest APY (some bonds and savings products)
- Cost Difference:Over 30 years on a $200,000 loan, daily vs. annual compounding can cost $1,000+ in extra interest
More frequent compounding increases your effective interest rate, making the loan more expensive.
The Interest Trap: Recognizing High-Cost Debt
What is the Interest Trap?
- Warning Threshold:Total interest > 50% of principal
- Example:$100,000 loan with $60,000 in interest = 60% interest ratio (trap zone)
- Solutions:Refinancing, consolidation, payment acceleration, or debt restructuring
The Interest Trap occurs when total interest payments exceed 50% of the original loan principal. This indicates high-cost debt that may benefit from optimization strategies.
If you're in the interest trap, consider aggressive payment strategies or refinancing to a lower rate to reduce total cost.
FAQ
? What is the difference between APR and APY?
APR (Annual Percentage Rate) is the nominal interest rate you're quoted. APY (Annual Percentage Yield) is the effective rate you actually pay after accounting for compounding frequency. For example, a 6% APR with monthly compounding results in a 6.17% APY. Daily compounding increases the APY even more, making the true cost of borrowing higher than the quoted APR.
? How do extra payments reduce my total interest?
Extra payments directly reduce your principal balance, which means less interest accrues each month. Since interest is calculated on the remaining balance, paying extra early in the loan saves the most money. For example, adding $100/month to a $200,000 mortgage at 6.5% can save over $30,000 in interest and cut 5-7 years off the loan term.
? What is a deferred payment loan?
A deferred payment loan allows you to delay all payments until a future date (maturity). Interest compounds during the deferral period, and you pay the full principal plus accumulated interest as a lump sum. This structure is common in student loans, some business loans, and zero-coupon bonds. The total cost is typically higher than standard amortized loans due to compound interest accumulation.
? How does compounding frequency affect my loan cost?
More frequent compounding increases your effective interest rate (APY). Daily compounding (common in credit cards) costs more than monthly compounding (common in mortgages). For example, a 6% APR loan with daily compounding has a 6.18% APY, while monthly compounding results in 6.17% APY. Over 30 years on a $200,000 loan, this difference can amount to hundreds or thousands of dollars.
? What is the "Interest Trap" warning?
The Interest Trap warning appears when your total interest payments exceed 50% of the original loan principal. This indicates high-cost debt that may benefit from refinancing, consolidation, or aggressive payment acceleration. For example, if you borrow $100,000 and pay $60,000 in interest, you're in the interest trap zone and should consider debt optimization strategies.
? How do I calculate my true monthly payment?
Your true monthly payment includes principal, interest, and any extra payments. Use the standard amortization formula: M = P [r(1+r)^n] / [(1+r)^n - 1], where P is principal, r is monthly rate, and n is number of payments. However, this calculator accounts for compounding frequency, converting APR to APY first, then calculating the effective monthly rate for more accurate results.
? What is a bond-style loan?
A bond-style loan (predetermined maturity) has a fixed maturity value that's higher than the principal. You make regular payments that accumulate toward the maturity value. This structure is common in zero-coupon bonds, some savings bonds, and certain investment products. The payment amount is calculated to ensure you reach the maturity value by the end of the term.
? When should I make a one-time payment?
One-time payments are most effective early in the loan term when interest charges are highest. Making a $5,000 payment in month 12 saves more than making it in month 120 because it reduces the balance that compounds over many more months. However, any extra payment reduces total interestโtiming just affects the magnitude of savings.