How to Calculate Monthly Loan Repayments (and What the Formula Actually Means)

The monthly loan repayment formula

Where P is the loan principal (amount borrowed), r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments (years multiplied by 12). Example: 10,000 loan at 8% annual rate over 3 years. Monthly rate r = 0.08 / 12 = 0.00667. Number of payments n = 36. Payment = 10,000 x (0.00667 x (1.00667)^36) / ((1.00667)^36 - 1) = 313.36. Total repaid = 313.36 x 36 = 11,281. Total interest = 1,281.

What drives your monthly payment

Three variables determine your monthly payment: the loan amount, the interest rate, and the term. Of these, the interest rate has the most nonlinear impact because it compounds over time. A 1 percentage point rate difference on a 20,000 loan over 5 years is approximately 10 per month in payment and 600 in total interest. The same 1 point difference on a 200,000 mortgage over 25 years is approximately 110 per month and 33,000 in total interest - because compounding operates over a much longer period.

How term length affects total cost

A longer term reduces the monthly payment but dramatically increases total interest paid. On a 15,000 personal loan at 9% annual rate: a 2-year term gives a monthly payment of 684 and total interest of 1,416. A 5-year term gives a monthly payment of 311 and total interest of 3,679. The 5-year option costs 2,263 more in total for the 'benefit' of paying 373 less each month. In most cases, the shortest term you can comfortably afford produces the best financial outcome.

Fixed vs variable interest rates

A fixed rate loan has the same interest rate for the full term - your monthly payment never changes. A variable rate loan (also called floating rate or tracker) moves with a benchmark rate such as the Bank of England base rate or the US federal funds rate. Variable rate loans typically start lower than fixed rates but expose you to payment increases if rates rise. For short-term loans (1-3 years), the rate risk is manageable. For long-term borrowing like mortgages, many borrowers prefer the certainty of a fixed rate, at least for an initial period.

APR vs interest rate: what is the difference?

The interest rate is the cost of borrowing expressed as an annual percentage of the principal. The APR (Annual Percentage Rate) includes both the interest rate and all mandatory fees charged to arrange the loan - origination fees, arrangement fees, broker fees - expressed as a single annual rate. APR is the more useful comparison metric when choosing between loans because it captures the total cost of credit. Two loans with the same interest rate but different arrangement fees will have different APRs.

Common mistakes

• Comparing monthly payments without comparing terms - a lower monthly payment on a longer term loan can cost significantly more in total interest.
• Not accounting for early repayment charges - some fixed-rate loans charge a fee if you repay early. Check the early repayment terms before signing.
• Ignoring the APR in favour of the headline rate - the advertised rate may not include fees. Always compare APR.
• Borrowing more than needed because the monthly difference is small - the difference between a 10,000 and 12,000 loan at 8% over 3 years is only 25 per month. Over three years that is 900 in extra interest plus the additional 2,000 principal.

Use the Loan Payment Calculator

The Loan Payment Calculator on this site calculates your monthly payment, total repaid, and total interest from the loan amount, annual interest rate, and term. Adjust the term slider to see how payment and total interest change across different loan lengths.