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Allison Murray

Calculating Loan Payments: How Different Loan Types Work

What kind of loan are you working with? Calculating loan payments can be done in a number of ways, so it’s important to understand the type of loan and its structure to ensure a payment schedule is done.

There are two key elements of a loan to consider before you can get started with loan payment calculations:

  1. How the payments are structured
  2. When and how interest accrues

Mixing up loan payment calculations is a common source of confusion when setting up a loan. To help keep things simple, let’s use a $50,000 loan at 10% interest example against different payment structure and interest accrual calculations based on loan type.

When Is Interest Calculated: Paid Date or Due Date?

With a paid date calculation, interest accrues through the date of the payment. Interest and principal portions vary based on the number of days between payments made.

If a borrower pays 10 days late on a $50,000 balance at 10% interest, about $137 in extra interest accrues.
That means less of the payment goes toward principal.
If the borrower pays early, however, more of the payment is applied to principal.

Calculating by due date is different, as interest is collected based on the scheduled due date versus when the borrower actually pays. The interest and principal portions of the payment follow the payment schedule so long as payments arrive on time.

Amortized Loans

The structure most familiar to private lenders, amortized loans involve fixed payment amounts the borrower pays each month. Amortized loans can be based on due date or paid date.

Amortized payments incorporate principal and interest, but the mix of each changes over time: the split is interest-heavy at first, with later payments shifting more of the amount remitted toward principal.

For example, a $50,000 loan at 10% rate over a 10-year term results in a monthly payment of about $661. That’s predictable monthly income for the lender.

You’ll see amortized loans most often with mortgages, seller-financed real estate notes, and long-term repayment deals that rely on predictable payments. Learn more about how to keep borrower payments flowing here.

Fixed Payment Loans

When you’re moving an existing signed note into a new system, or a borrower can only commit to a certain amount each month, a fixed payment loan lets lenders set the payment amount yourself.

If the payment isn’t enough to pay the loan down within the term, then the remaining balance becomes a balloon payment due at the end. Using that $50,000 at 10% interest example, a $500 monthly payment over 5 years leaves about $43,500 due as a balloon payment.

Lenders should make sure the payment at least covers the monthly interest accrued, which in the above example is about $417. Otherwise the loan won’t pay down at all.

Final Payment Loans

Flipping the fixed payment approach, a final payment loan structure allows lenders to choose the balloon amount and from there calculate amortized payments toward it.

Let’s revisit the $50,000 loan at 10% over 5 years:

  • If the lender sets a balloon for $40,000, the monthly payment comes out to about $546.
  • Over those initial 60 payments, the borrower pays $10,000 toward principal and $22,700 toward interest.
  • Then the $40,000 balloon comes due.

Usually the borrower’s plan for paying the balloon will be outlined in the deal term, such as refinancing or selling the property. This is an important point of clarification with the borrower to help prevent default.

Interest-Only Loans

Designed to keep payments lower during a set timeframe, interest-only loans involve the borrower paying interest without reducing the principal balance. Unless the loan is refinanced or paid off another way (like with extra payments), the full principal portion of the loan comes due at the end of the deal term as a balloon payment.

With that $50,000 at 10% loan example, the monthly payment is about $417 with the full $50,000 coming due at the balloon date. Wondering if a private loan with a balloon payment makes sense? Learn more here.

Simple Interest Loans

Simple interest loan payments are calculated with the interest following the balance. Interest is only charged on the balance still owed, so the loan cost decreases as the principal is paid down.

The most familiar example is a student loan. Most student loan payment calculations follow this formula:

Daily interest = (principal balance x annual rate) ÷ 365

On a $50,000 balance at 10%, that’s about $13.70 per day. Sometimes students are given the option to make no payments for the first year while enrolled in school, with the unpaid interest capitalized (added to the principal).

Principal and Interest At Maturity Loans

Some loans have no regular payments whatsoever as the amount owed grows.

When lenders choose this type of loan, called principal and interest at maturity, it typically means repayment is tied to one payoff event like a sale. Interest accrues over the term, with the borrower paying everything (principal plus interest) in a single payment at the end.

Rules for when borrowers pay what they owe must be clearly documented in the loan’s promissory note. Learn more about how to properly structure promissory notes here.

Choosing The Right Loan Payment Structure

Calculating loan payments means selecting the deal structure that fits with the purpose of the loan, and understanding how interest accrues inside the deal. There may be restrictions on the type of loan you can create based on the asset involved in the deal.

Want to try different loan payment calculations yourself? Use our Free Loan Tracker here.

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Allison Murray is a recognized payments and financial technology expert with more than 10 years of leadership experience in payment technology and financial services infrastructure. With a proven track record of developing frameworks that drive value creation for fintech companies, Allison’s technical knowledge and industry foresight have earned peer recognition across the payments industry. She has spoken at leading fintech conferences including Money20/20 and Finovate, received the Los Angeles Business Journal’s Women’s Leadership Award in 2020, and actively contributes to the fintech community through NYC Fintech Women and the Women’s Network in Electronic Transactions (WNET).

Disclaimer: This article provides general information for private lenders about tracking loans, payments, and investor returns. It is not legal, tax, or accounting advice. Loan structures, reporting, and compliance requirements vary by jurisdiction and circumstances. Consult qualified legal and tax professionals before making decisions based on this information.

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