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What is Monthly Payment?

What is Monthly Payment?

A monthly payment is the amount paid each month until the loan is fully paid off. It consists of the interest rate, term of the loan, and the principal. In an installment loan application, borrowers are set up on an amortization repayment schedule which creates equal payment amounts every month.

For instance, if Meredith has an installment loan of $450, and the payment is $45 per month, $30 of the monthly payment might go towards the interest while the other $15 goes towards the principal. This may change as the amortization schedule progresses, moving more of the monthly payment over time towards the principal. If, however, Meredith’s loan is $850 and her payment is $85 per month, then her monthly payment will be higher overall, with more going towards the interest and the principal than if her loan amount was lower.

It is important for monthly borrowers to be aware of the monthly payment amount they agree to in the loan so they can properly budget for it and account for how much of that payment goes towards paying the principal versus the interest. In time, they may even be able to make additional payments to make more progress on the loan, paying it off sooner than they planned.

Financial Terms and Definitions