Installment cost in 3 steps
- Monthly rater = APR ÷ 12
- Monthly paymentA × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1); at 0% APR it is A ÷ n
- Total finance chargeInterest each month = remaining balance × r, added up over all payments
Monthly payment = A × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1)
How installment payments are calculated
Store financing, credit card installment plans, buy now pay later services and many personal loans split a purchase into equal monthly payments. Each month you are charged interest on the balance that is still unpaid, and the rest of your payment reduces that balance. Because the balance shrinks, the interest part gets smaller every month while the payment stays the same.
- Monthly rate r = APR ÷ 12.
- Monthly payment =
A × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1), where A is the amount financed and n is the number of payments. At 0% APR it is simply A ÷ n. - Interest each month = remaining balance × r, rounded to the cent.
- Total finance charge = the sum of all monthly interest = total of payments − amount financed.
Worked example
A 1,200 laptop financed at 15% APR. The first month’s interest is 1,200 × 15% ÷ 12 = 15.00.
| Plan | Monthly payment | Finance charge | Total paid |
|---|---|---|---|
| 12 months at 15% APR | 108.31 | 99.72 | 1,299.72 |
| 24 months at 15% APR | 58.18 | 196.45 | 1,396.45 |
| 4 payments at 0% (pay in four) | 300.00 | 0.00 | 1,200.00 |
Doubling the term from 12 to 24 months almost halves the payment, but it nearly doubles the finance charge. The 0% plan costs nothing extra as long as every payment is made on time.
Tips for choosing a plan
- Compare APR, not the monthly payment. A lower payment over more months nearly always costs more in total. Use the comparison button to see both plans side by side.
- Read the fine print on 0% offers. Some promotions use deferred interest: if any balance is left at the end of the promo, interest is charged back to the purchase date. Others add late fees for a missed payment.
- Watch for flat fees. Some plans charge a fixed fee or a monthly service charge instead of interest. Add it to the finance charge shown here to make a fair comparison.
- Consider paying with savings. If you have the cash and the plan charges interest, compare the finance charge with what that money would earn in a savings account. Usually the loan costs more.
- Pay early if allowed. Most installment plans charge interest on the remaining balance, so paying off sooner cuts the finance charge. Check whether there is any early payoff fee.
Installment plan or credit card?
If you would otherwise carry the purchase on a credit card, compare the plan’s APR with your card’s purchase APR. Card interest is often higher, so a fixed installment plan can be cheaper and easier to budget because the payoff date is set. On the other hand, if you can pay the card in full within the grace period, there is no interest at all and the card may be the better choice.
Cautions
Lenders may calculate interest daily, start the first payment at a different date, or add taxes and fees, so the exact amounts on your statement can differ by a little. Credit card issuers may also apply a different rate to installment balances than to regular purchases. Using too many installment plans at once can make your monthly budget tight and may affect your credit, so keep track of every plan you have open.