How loan repayments work
Updated 30 October 2026 · 8 minute read
A loan is a trade: someone gives you money now, and you give it back later with interest. The monthly payment is not negotiated separately — it follows from three numbers: how much you borrow, the interest rate, and how long you take to repay.
Once you understand how those three numbers interact, offers become much easier to compare. This guide shows the formula our loan calculator uses, why the early years feel expensive, and what the advertised rate leaves out.
The monthly payment formula
For a fixed-rate loan with equal monthly payments, the payment is:
M = P × i × (1 + i)n / ((1 + i)n − 1)- M — the monthly payment.
- P — the amount borrowed (the principal).
- i — the monthly interest rate: the annual rate divided by 12. A 6.5% annual rate is 0.065 / 12 = 0.0054167 per month.
- n — the total number of payments: years × 12, plus any extra months.
The formula is built so that the loan is exactly zero after the last payment. Change any input and the payment changes; the relationship is fixed, not a matter of opinion.
One special case is worth knowing. At a 0% interest rate the formula divides by zero, so the payment is simply the amount divided by the number of months: a $20,000 loan over 60 months costs $333.33 per month, and the total repaid is exactly $20,000.
A worked example: $300,000 at 6.5% for 30 years
Borrow $300,000 at a fixed 6.5% annual rate over 30 years (360 payments):
| Item | Amount |
|---|---|
| Monthly payment | $1,896.20 |
| Interest in the first payment | $1,625.00 |
| Principal in the first payment | $271.20 |
| Interest paid over the full term | $382,633 |
| Total repaid | $682,633 |
Two things stand out. First, the interest over 30 years is larger than the amount borrowed. Second, in the very first payment only about 14% goes to the principal; the rest is the cost of the outstanding balance.
The calculator rounds each displayed amount but computes with full precision, and the final payment is adjusted by a few cents so the balance ends at exactly zero.
Why early payments are mostly interest
Interest is charged on the balance that is still owed. At the start that balance is at its highest, so the interest share is at its highest too. Each payment covers the interest first, and whatever is left reduces the principal. As the principal falls, the interest charge falls with it, and more of the same payment goes to the principal.
This is called amortization. In the example above, the balance is still about $296,647 after the first year and about $280,833 after five years. The change feels slow at first and accelerates later — most of the principal is repaid in the second half of the term.
The yearly view in the loan calculator shows this directly: interest paid falls every year while principal paid rises.
Shorter term versus longer term
The same $300,000 at 6.5% under three different terms:
| Term | Monthly payment | Total interest | Total repaid |
|---|---|---|---|
| 15 years | $2,613.32 | $170,398 | $470,398 |
| 25 years | $2,025.62 | $307,686 | $607,686 |
| 30 years | $1,896.20 | $382,633 | $682,633 |
A longer term lowers the monthly payment but raises the total interest, because the balance stays outstanding for longer. The 30-year payment is about $717 lower per month than the 15-year payment, but it costs about $212,000 more in interest over the life of the loan. Neither is automatically right: the choice depends on whether the lower payment is necessary for your budget.
Interest rate is not the same as APR
The rate you enter in the calculator is the nominal annual interest rate used to work out the payment. The APR (annual percentage rate) is a broader measure: it folds in arrangement fees, valuation charges and some other costs, then expresses them as a yearly rate. That is why the APR on an offer is usually higher than its headline rate.
When comparing two lenders, compare APR to APR, not rate to rate. A loan with a slightly lower rate but a large upfront fee can be more expensive than one with a slightly higher rate and no fee. Ask for the total amount payable as well — it is the number that actually leaves your account.
Fixed and variable rates
A fixed rate stays the same for an agreed period, so the payment is predictable. A variable rate follows a reference rate and can move up or down; the payment is recalculated when it changes. Our calculator models a fixed rate only. If your loan is variable, run the calculation again with a higher rate to see what the payment would become — that is the stress test a lender would apply.
Extra payments
Paying more than the scheduled amount reduces the balance earlier, which reduces future interest. On the example loan, adding $100 to every monthly payment would clear the balance in about 26 years instead of 30 and save roughly $61,000 in interest.
Check the contract first. Some lenders charge a prepayment penalty or limit overpayments during a fixed-rate period. Others allow overpayments but apply them on the next anniversary rather than immediately, which changes the saving.
What the payment does not include
The calculator covers principal and interest only. A real mortgage payment often also includes:
- Property tax, usually collected monthly into an escrow account.
- Buildings insurance and, in some countries, mortgage insurance.
- Arrangement, valuation and legal fees, paid upfront or added to the loan.
- Service charges for apartments and shared buildings.
Add these to the monthly figure before deciding whether a loan fits your budget. A payment that looks comfortable at $1,896 can become tight once tax and insurance are included.
Reading the amortization schedule
The schedule lists every payment in order: the date, the payment, how much went to principal, how much went to interest, and the balance remaining. The yearly view groups the same figures by calendar year, which is useful for tax returns and for seeing the shape of the loan at a glance.
Print it, keep it, and compare it with your lender’s statement. If a figure differs by more than rounding, ask why — the arithmetic here is the standard one, so a difference usually means a fee, an insurance charge or a different day-count convention.