Money tool
What does that loan actually cost?
The monthly payment is the number you are sold. The total, and how much of it is interest, is the number that matters. Put a home, car or personal loan in and see both.
- Last reviewed
- Method
- Standard amortisation formula · the same one lenders use
- Your figures
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Car loans commonly run 6-9%; personal loans higher
Anything paid above the required amount goes straight at the balance.
What this assumes
- A fixed rate for the whole term, and no fees.
- Payments made on time, every month, starting immediately.
- Interest charged monthly on the balance that is left.
A real offer will include arrangement fees, and a variable rate can move. Treat this as the shape of the loan, not the agreement.
Monthly payment
$601
for 5 years · cleared by October 2031
$6,068
Total interest
$36,068
Total paid
17%
Interest share
Where your payments go
- Principal$30,000
- Interest$6,068
Year by year
What is still owed at the end of each year, and what the interest has cost by then.
| Year | Still owed | Interest so far |
|---|---|---|
| 1 | $24,862 | $2,076 |
| 2 | $19,325 | $3,753 |
| 3 | $13,359 | $5,000 |
| 4 | $6,929 | $5,784 |
| 5 | $0 | $6,068 |
The same loan over 3 years
The payment rises to $933 a month, an extra $332, and the interest falls from $6,068 to $3,595. A shorter term buys a bigger saving than a lower rate usually does.
A guide, not a quote. This is the payment on the loan itself. An offer you are shown may add arrangement fees, insurance, or a different rate once a fixed period ends, so treat it as the floor rather than the total.
How this works
The monthly payment
payment = P × r / (1 − (1 + r)^−n)
- P — the amount borrowed
- r — the annual rate divided by 12, as a decimal: 9% a year is 0.0075 a month
- n — the number of monthly payments: 20 years is 240
Why the payment stays level and the split does not
A repayment loan is designed so that every payment is the same size. That is the whole purpose of the formula above: it solves for the one amount that, charged every month, clears the balance exactly as the last payment lands.
What changes is what each payment is made of. Interest is charged on what you still owe, so in the first month it is at its largest and the amount coming off the balance is at its smallest. As the balance falls the interest falls with it, and more of the same payment starts going to the debt itself. This is why the early years of a long loan feel like nothing is happening — and why overpaying early is worth far more than overpaying late.
A worked example
Borrow 200,000 over 20 years at 9%. The monthly rate is 0.09 ÷ 12 = 0.0075 and there are 240 payments, which gives a payment of 1,799 a month.
Over the full term that adds up to 431,868, of which 231,868 is interest. Put another way, 53.7% of everything handed over is the cost of borrowing rather than the thing borrowed — more than half.
Now shorten the term to 15 years and nothing else. The payment rises to 2,029, which is 230 more a month, and the total interest falls to 165,136. That is 66,732 saved. A shorter term almost always buys a larger saving than hunting for a slightly lower rate, because it removes whole years during which interest would have been charged at all.
What the number leaves out
This is the shape of the loan, not the agreement. A real offer carries costs the arithmetic above does not know about.
- Arrangement, origination, valuation and early-repayment fees, which can move the true cost by a large margin on a small loan.
- A variable rate. If the rate moves, the payment or the term moves with it, and this calculation assumes neither happens.
- Insurance or protection products sold alongside the loan.
- The timing of the first payment. The calculation starts the clock immediately; a lender may not.
Questions people ask
Why is my lender quoting a different monthly payment?
Three usual reasons. The quote may include fees financed into the loan, so the amount borrowed is larger than the figure you entered. The lender may compound daily rather than monthly. Or the advertised rate may be a representative APR that only some applicants receive. Comparing the total payable rather than the monthly payment makes those differences visible.
Is it better to overpay or to take a shorter term?
Mathematically they are close to the same thing: both cut the time interest is charged for. A shorter term is a commitment and usually gets a slightly better rate; overpaying is flexible but easy to stop. If your income is steady, the shorter term enforces the saving. If it is not, overpay when you can and keep the lower required payment as a safety net.
Does paying extra reduce my monthly payment?
Usually not by default. Most lenders apply an overpayment to the balance and keep the payment the same, which shortens the term. Some will instead recalculate the payment over the original term, which lowers the monthly amount but saves far less interest. It is worth asking which one your lender does, because they are very different outcomes.
Why does so much of the early payment go to interest?
Because interest is charged on the balance outstanding, and at the start the balance is at its largest. There is nothing unusual or unfair happening — it falls directly out of the formula. It is simply the reason that overpaying in year two is worth much more than overpaying in year eighteen.
Method and figures last reviewed . Every worked example here is produced by the same calculation the page runs — enter the same inputs above and the numbers will match.