DigiKitHow Loan Payments Are Calculated: Interest, Term and Total Cost
The monthly payment formula for fixed-instalment loans, how the term changes total interest, and what to compare between offers.
When you look at a loan offer, your eye goes to the monthly payment first. What matters more is how much you will have paid in total by the end. This guide explains where a fixed monthly payment comes from and what to compare between offers.
The fixed-payment formula
Most personal and car loans use a structure where you pay the same amount every month. The payment is payment = principal × r ÷ (1 − (1 + r)−n), where r is the monthly interest rate (0.01 for 1 percent) and n is the term in months.
Example: 10,000 at 1 percent a month over 12 months. The formula gives a payment of about 888.49. Twelve payments add up to 10,661.85, so you pay roughly 661.85 in interest.
A longer term lowers the payment and raises the cost
Spread the same loan over 24 months and the payment drops to about 470.73, but the total rises to 11,297.63. The interest nearly doubles. Fitting the payment into your budget matters, but "the lowest payment" often means "the most expensive loan". The shortest term you can afford is usually the cheapest.
Why early payments are mostly interest
Interest is charged each month on the remaining balance. At the start the balance is at its highest, so most of each payment goes to interest. As the balance falls, the interest share shrinks and the principal share grows. That is why paying a loan off early saves the most when it happens early in the term.
The interest rate alone is not enough
Fees, insurance and, in some countries, taxes on interest can be added to a loan. Comparing two offers by interest rate alone can mislead you. The annual percentage rate (APR) or the total amount repayable gives a truer picture of the cost, and lenders usually have to disclose it. Check the repayment schedule your lender provides.
When comparing offers
- Put the total repayable side by side for the same amount and term.
- Ask whether fees, insurance and taxes are included.
- Find out the conditions and charges for early repayment.
- Keep the payment at a level your income covers comfortably, with room for an unexpected bill.
Enter the amount, the annual rate and the number of months in the loan calculator to see the monthly payment, total paid and total interest. The result does not include fees or taxes, so use it as a starting point to compare with the lender's schedule. This guide is not financial advice.