How to Calculate Principal and Interest
Learn how principal and interest impact your loan payments
Updated March 07, 2025
Principal is the amount you borrowed, and interest is the amount you pay to the lender as a charge for borrowing. To calculate interest, multiply the principal amount by the interest rate, then multiply by the number of years of the loan term. Knowing how to calculate interest with the principal and rate will help you to determine how much a simple interest loan will cost.
The calculation can be more complex for some loans, like amortized loans (mortgages) or those with compound interest (like credit cards). With simple interest, your interest payments remain the same over time. But with amortized loans, you pay more interest at the start.
Learn about the different types of interest lenders can charge you and how to calculate principal and interest for your loan using an example of a mortgage.
Key Takeaways
- To find the total interest on a simple interest loan, multiply the principal by the interest rate, then multiply that result by the loan term.
- To find your monthly principal payment on a simple interest loan, divide the principal by the months in the loan term.
- A loan calculator can help you figure out more complex amortized loans by showing how the amortized interest payments work.
- With fixed-rate loans, your monthly payment stays the same.
Principal and Interest
When you make a loan payment, part of your money is spent on interest, while another part pays off the principal. Knowing how banks and credit unions calculate these two parts of your loan payments can help you understand your repayment plans.
What Is Principal?
Principal is the original loan amount you borrow, not including any interest. For example, with a mortgage, you can buy a $355,000 home and put down $55,000 in cash. That means you would need to borrow $300,000 from the mortgage lender, which would be the principal. You would need to pay that back over the length of the loan, plus interest.
What Is Interest?
Interest is the amount the bank charges for lending you the money. Typically, personal loans and other shorter-term, fixed-rate loans use a simple interest calculation. However, longer-term loans, such as mortgages, are amortized.
The formula to calculate the principal and interest on a simple interest loan is SI = P * R * T, whereby:1
- P = principal or borrowed amount
- R = interest rate
- T = time or the number of years in the loan
Example Mortgage Interest Calculation
Lenders multiply your balance by the annual interest rate. Then, they divide that number by 12 since you’re paying monthly. So if you owe $300,000 on your mortgage and your rate is 4%, you’ll initially owe $1,000 monthly interest ($300,000 x 0.04 ÷ 12). The rest of your mortgage payment will be applied to your principal.
If you enter your purchase price, down payment, mortgage interest rate, and loan length into the Investopedia Mortgage Calculator, you will find that your monthly payments to the lender in this example would be $1,432.25. Your first payment would include $1,000 for interest costs. This means that $432.25 would pay down your loan balance or principal.
Tip
Other loan costs may include mortgage insurance or property taxes held in escrow.
How Amortization Works
With a fixed-rate loan, your monthly mortgage payment stays the same for the loan term. At the beginning, a larger portion of your early payments covers interest, with less going toward principal. Over time, more of your payment reduces the loan balance. Lenders use amortization to keep payments steady, making them more predictable and manageable.
During the early years of amortization, your monthly payment mainly covers interest. Only a small part goes toward paying down the principal. Then, the interest amount declines as the interest rate applies to a shrinking principal balance.
Example of Amortization
The following table shows the monthly payments at various points in your imagined 30-year $300,000 mortgage. You will see that the interest portion of the monthly payments decreases while the principal portion increases over the life of the loan.
| Mortgage Loan Amortization with Principal and Interest Breakdown | |||
|---|---|---|---|
| Year | Principal | Interest | Monthly Payment |
| Year One | $432.25 | $1,000 | $1,432.25 |
| 15 Years | $786.82 | $645.43 | $1,432.25 |
| 20 Years | $960.70 | $471.54 | $1,432.25 |
| 30 Years | $1,427.49 | $4.76 | $1,432.25 |
Assuming you don’t refinance, your loan payment amount will remain the same for the term. For example, 15 years later, your principal balance will decrease to approximately $193,000. At that point, multiplying $193,000 by the interest rate (0.04 ÷ 12 months) results in an interest payment of $645.43. Since more of your payment would now go toward the principal, $786.82 of your $1,432.25 monthly payment would be applied to the loan balance.
Note
Curious about your real-life mortgage payments? The Investopedia Mortgage Calculator can help you determine how much of your payments will go to principal and interest throughout the life of your loan.
Adjustable Rate Mortgages
With a fixed-rate mortgage, your monthly payment stays the same for the entire loan term if you pay the required amount. Over time, less of your payment goes toward interest and more toward the principal, but the total payment remains unchanged.
An adjustable-rate mortgage (ARM) works differently. It starts with a fixed interest rate for a set period—typically one, five, or seven years—before adjusting at regular intervals. After this initial phase, the rate resets based on market conditions, which can cause your monthly payment to increase or decrease. In many cases, the introductory rate is lower than market rates, making early payments more affordable before potential rate hikes.2
Important
With an adjustable-rate mortgage, your monthly payment can change because your remaining principal is multiplied by different interest rates over time.
Interest Rate vs. APR
When shopping for loans, you’ll see the term annual percentage rate (APR) alongside the interest rate, but they aren’t the same. Understanding the difference can help you compare loan offers more effectively.3
The interest rate is the percentage a lender charges on your loan balance and it does not include other fees. In contrast, the APR includes the total cost of borrowing, factoring in loan origination fees, mortgage insurance, discount points, and some closing costs. Because of these added expenses, the APR is typically higher than the interest rate.
Your monthly payment is based on the interest rate, not the APR, but the APR provides a clearer picture of the loan’s true cost over time. A loan with a low interest rate may still have a high APR if it comes with significant fees.
Lenders are legally obligated to include the APR in the loan estimate they provide after you apply to give you the most accurate view of the true cost of borrowing that money.4 Since some lenders offer lower in
