What a Loan Actually Costs
A loan is usually shopped for on the monthly payment, because that is the number that has to fit a budget. It is also the number that hides the most: two loans with the same payment can differ by thousands in total interest if their terms differ, and the longer one always looks more affordable while costing more.
This calculator gives the monthly payment, the total interest and the full repayment, so the affordability question and the cost question can be answered separately.
How to Calculate a Loan Payment
Three inputs determine everything, and the term is the one that quietly changes the total.
- Enter the amount you intend to borrow.
- Enter the annual interest rate. Use the APR where you have one, since it includes fees that a headline rate may not.
- Enter the term in years or months.
- Read the monthly payment, then read the total interest beside it. The payment answers whether you can afford it; the interest answers whether it is worth it.
- Try a shorter term and compare. A payment that rises modestly often cuts the total interest substantially, which is the trade most worth examining.
- Check the amortisation breakdown to see how the split between interest and principal changes over the life of the loan.
Why Early Payments Are Mostly Interest
Interest is charged on the balance outstanding, which is at its largest at the start. On a typical 25-year mortgage, the first payment can be seventy per cent interest and thirty per cent principal, and the crossover point where more goes to principal than to interest often falls more than a decade in. The payment stays constant while its composition shifts steadily.
That shape is why overpaying early has a disproportionate effect. An extra payment in year one removes principal that would otherwise have accrued interest for the remaining twenty-four years, whereas the same amount in year twenty saves interest for only a few. On a long loan the difference between the two can be several times over.
Term Against Total Cost
A 20,000 loan at 7% APR, showing what extending the term does to the payment and to the total.
| Term | Monthly payment | Total interest | Total repaid |
|---|---|---|---|
| 2 years | 895 | 1,486 | 21,486 |
| 3 years | 618 | 2,238 | 22,238 |
| 4 years | 479 | 3,000 | 23,000 |
| 5 years | 396 | 3,774 | 23,774 |
| 7 years | 302 | 5,368 | 25,368 |
| 10 years | 232 | 7,867 | 27,867 |
Going from three years to ten cuts the monthly payment by nearly two thirds while more than tripling the interest. That trade is the entire reason long terms are offered, and reading only the payment column is how it stays invisible.
APR, Fees and What to Compare
A headline interest rate and an APR are not the same thing. APR is intended to include arrangement fees and compulsory charges, which makes it the fairer basis for comparing two offers. A loan with a lower rate and a large arrangement fee can be more expensive than one with a higher rate and none.
Early repayment terms are the other clause worth reading before signing. Some loans charge a penalty for settling early, which removes the benefit of overpaying and changes the arithmetic above entirely. Where you expect to repay ahead of schedule, a slightly higher rate with no early repayment charge is often the cheaper loan in practice.