Formula
M = P · r ÷ (1 − (1 + r)^−n)r = annual rate ÷ 12, n = number of monthly payments How it works
Most consumer loans — car loans, personal loans and mortgages — are amortizing: every monthly payment is the same, but early payments are mostly interest and later ones are mostly principal.
Shortening the term raises the monthly payment but can cut total interest dramatically, because you owe interest on a smaller balance for less time.
Frequently asked questions
Why is so much of my early payment interest?
Interest is charged on the outstanding balance, which is largest at the start. As the balance shrinks, the interest part of each payment shrinks and more goes to principal.
Does this include fees or insurance?
No. Origination fees, insurance and taxes are extra. Compare loans using the APR, which folds required fees into the rate.