Installment Calculator

The payment comes from the standard amortization formula: payment = principal × i ÷ (1 − (1 + i)^−n), where i is the periodic interest rate and n the number of payments. A $1,000 purchase at 2% a month over 12 payments works out to about $94.56 a month. Twelve of those is $1,134.72, so the credit costs roughly $135 on top of the cash price. What the formula is doing is finding the one level payment that exactly retires the balance in n periods while charging interest on whatever is still outstanding each period. That is why the payment is not simply the price divided by twelve plus a flat fee — the balance shrinks as you go, and so does the interest portion of each payment. One consequence is worth internalizing: stretching the term lowers the payment and raises the total. The same $1,000 at 2% over 24 payments drops the monthly figure to about $52.87, but the total climbs to roughly $1,269.

Two percent a month is not 24% a year in any meaningful sense. Compounded, (1.02)^12 − 1 = 26.8%. The extra 2.8 points is the interest charged on interest. The gap grows quickly with the rate. 1% a month is 12.7% a year. 1.5% is 19.6%. 3% is 42.6%. Any time a rate is quoted per month, per week, or "per pay period", compound it before comparing it against anything annual. There is a wrinkle in US disclosure worth knowing. Under the Truth in Lending Act, the APR on a closed-end loan is a nominal annualized figure — the periodic rate multiplied by the number of periods — so a 2% monthly rate is disclosed as a 24% APR even though the effective annual rate is 26.8%. The APR is still the number to compare offers with, because it is calculated the same way by every lender and it folds in certain finance charges; just do not read it as the effective compounded cost. And there is a reverse illusion at the other end. Paying $135 of interest on $1,000 over a year sounds like 13.5%, not 26.8%. Both are true: you were only holding the full $1,000 at the start, and by the end you owed almost nothing. Interest is charged on the average balance outstanding, which on a level-payment loan is a little over half the original.

Every payment splits into interest and principal, and the split moves over the life of the plan. On that $1,000 at 2%, the first payment carries 1,000 × 0.02 = $20 of interest and $74.56 of principal. The second is charged on the reduced balance of $925.44, so interest falls to $18.51 and principal rises to $76.05. By the final payment, almost the entire $94.56 is principal. This front-loading has practical consequences. Paying off early saves less than people expect at the end and more than they expect at the beginning — the interest you avoid is only the interest on the periods you skipped. It also means that in the first months you have paid a meaningful amount and reduced the balance by less than that amount, which matters if you are financing something that loses value quickly. It is also why an extra payment applied to principal is disproportionately effective early in the term: it removes that amount from every subsequent interest calculation.

The comparison is only honest when both sides are complete. If you can pay cash, the question is not "can I afford the payment" but "what does the credit cost, and what would the cash have done instead?" Here the credit costs $135 over a year. Money kept in a savings account earning less than that over the same period does not make the financing worthwhile; the arithmetic has to clear the hurdle, not merely exist. Zero-percent offers need one specific check: is there a cash discount you are giving up? A store offering "$1,000 in 12 interest-free payments, or $950 cash" is charging $50 for the credit, which is real interest wearing a different label. Compare the total you pay each way, not the advertised rate. Also look past the payment schedule for things the formula cannot see: origination or documentation fees, mandatory insurance or protection products bundled into the plan, late fees, and what happens if a payment is missed. Deferred-interest promotions are the sharpest edge here — some accrue interest from day one and charge all of it retroactively if the balance is not cleared by the promotional deadline. Read the terms for the word "deferred". This calculator estimates the arithmetic of a level-payment plan. It is not financial advice, and it cannot see your circumstances; check the disclosed APR and total finance charge on the actual agreement before signing anything.

The payment being affordable this month is the weakest possible test, because installment plans commit future income you have not earned yet. A more useful habit is to add up all the obligations already running — the plan you took last quarter, the phone, the car, the card minimums — and look at the total against income rather than each one in isolation. Small individually affordable payments are precisely how debt loads accumulate without any single decision looking unreasonable. Three questions worth answering before agreeing: Will I still be using this when the last payment clears? Would I buy it at the total price rather than the cash price? And what happens to this obligation if my income drops for a couple of months? If the answers are uncomfortable, a shorter term at a higher payment usually costs far less overall than a longer one at a comfortable payment — and it ends.