How do you calculate principal and interest?

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How do you calculate principal and interest?
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Principal + Interest paymentsShare

In a principal + interest loan, the principal (original amount borrowed) is divided into equal monthly amounts, and the interest (fee charged for borrowing) is calculated on the outstanding principal balance each month.

This means the monthly interest amount declines over time as the outstanding principal declines. As a result, a principal + interest loan results in less interest than a blended payment loan.

More about principal + interest payments

Below is an example of a $100,000loan with a 12-month amortization, a fixed interest rate of5% and equal monthly payments of principal + interest with a declining total payment. The principal payment stays the same each month, while the interest payments and total monthly payments decline.

  • Bank operating loan
  • Borrower
  • Loan
  • Lender
  • Lending agreement

Find out more in our glossary

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