Loan Interest Calculator
Want to know how much interest you'll pay on a loan? Enter the amount, rate, and term to see total interest costs for simple or compound interest loans.
Understanding Simple vs. Compound Interest
Simple interest applies a percentage to the original loan amount, year after year. If you borrow $20,000 at 8% simple interest for 5 years, you pay $1,600 per year in interest, totaling $8,000.
Compound interest recalculates each period based on your remaining balance. Most installment loans use compound interest with monthly compounding. You pay interest on unpaid interest, which increases total costs beyond simple interest.
A $20,000 loan at 8% over 5 years with monthly compounding costs $4,365 in total interest—far less than simple interest because you're paying down principal each month, reducing the balance that accrues interest.
How Lenders Calculate Interest on Your Loan
Consumer loans use amortized compound interest. Each month, the lender calculates interest on your current balance. Your payment covers that interest plus a chunk of principal.
Let's say you owe $20,000 at 8% annual (0.6667% monthly). Month one's interest is $20,000 × 0.006667 = $133.34. If your payment is $405.53, then $272.19 goes toward principal. Next month, you owe $19,727.81, and interest drops to $131.52.
This cycle continues for the entire term. Early payments are interest-heavy; later payments are principal-heavy. The total interest paid depends on your rate, term, and how aggressively you pay down the balance.
Strategies to Minimize Interest Costs
Negotiate the lowest possible rate. A 1% rate reduction on a $20,000, 5-year loan saves about $550 in total interest. Shop multiple lenders and use competing offers to bargain for better terms.
Choose the shortest term you can afford. A $20,000 loan at 8% costs $4,365 in interest over 5 years but only $1,659 over 3 years. The 3-year monthly payment is higher ($626.66 vs. $405.53), but you save $2,706 in interest.
Make extra principal payments whenever possible. Even an extra $50 per month can cut months off your term and save hundreds or thousands in interest. Specify that extra payments go to principal, not future interest, to maximize the benefit.
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest charges a fixed percentage of the original principal. Compound interest charges interest on the principal plus any accrued interest, causing costs to grow faster.
Do most loans use simple or compound interest?
Most consumer loans (mortgages, auto, personal) use compound interest with monthly compounding. Simple interest is rare, mainly found in short-term or payday loans.
How is loan interest calculated?
Lenders calculate interest daily or monthly on your remaining balance. Each payment covers that period's interest plus some principal. As your balance drops, interest charges shrink.
Can I reduce the total interest I pay?
Yes. Make extra principal payments, choose a shorter loan term, or negotiate a lower interest rate. All three strategies reduce total interest substantially.
Why does a longer loan term mean more interest?
Because you're borrowing the money for more months, interest accrues longer. A $20,000 loan at 8% costs $4,365 in interest over 5 years but $8,693 over 10 years.