Loan Calculator
The monthly payment is the number lenders advertise. The total interest is the number that decides whether the loan is good value.
The amortisation formula
Every ordinary loan — personal, car, mortgage — uses the same equation to find the level payment that clears the balance exactly at the end of the term:
The monthly rate is the annual rate divided by twelve. Note that this is the nominal convention lenders use; it is not quite the same as the twelfth root of the annual rate, which is why an APR of 7.5 % compounds to slightly more than 7.5 % over the year.
Why early payments are mostly interest
Each month, interest is charged on the balance that remains. Early on the balance is large, so most of your payment covers interest and only a little reduces the debt. As the balance falls, the interest portion shrinks and the principal portion grows — slowly at first, then quickly.
On a £20,000 loan at 7.5 % over five years, the first payment of £400.76 splits into £125 of interest and £275.76 of principal. By the final payment, almost all of it is principal. This is also why paying off a loan early saves less than people expect if they are near the end of the term, and a great deal if they are near the start.
It is the reason extra payments made in year one are worth several times the same amount paid in year four: every pound of extra principal removes all the future interest that pound would have generated.
APR, fees and the real cost
The advertised interest rate is not the whole cost. The APR is designed to include compulsory fees and express everything as one annual figure, which makes it the right number for comparing offers — provided the loans have the same term.
Watch the term, not just the payment. Extending a £20,000 loan from five years to seven cuts the monthly payment by roughly £95, which looks like a saving. It adds about £1,600 in total interest. Lenders advertise the monthly figure because it is the one that feels affordable.
Two further things to check before signing: whether early repayment carries a penalty (in the UK, regulated personal loans cap it at about 58 days' interest), and whether the rate is fixed or variable. A variable rate makes every figure here provisional.
Frequently asked questions
Should I take a longer term to lower the payment?
Only if the shorter term is genuinely unaffordable. A longer term always costs more in total interest, and on a depreciating asset like a car it raises the risk of owing more than the item is worth. If cash flow is tight, a longer term with overpayments — where permitted without penalty — gives you the flexibility without the full cost.
Is it worth overpaying?
Usually, and earlier is far better than later. Every extra pound of principal eliminates all the interest that pound would have accrued for the rest of the term. Compare the loan rate against what the same money would earn elsewhere: overpaying a 7.5 % loan is a guaranteed 7.5 % return, which is hard to beat risk-free.
Why does my lender's figure differ slightly?
Rounding conventions, day-count methods (some lenders charge daily interest on the actual balance rather than monthly), and the treatment of fees. Differences of a pound or two a month are normal. Anything larger usually means fees are being handled differently — ask for the total amount payable, which is the figure that settles it.