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A loan repayment is calculated using the annuity formula, a fixed periodic payment that covers both the interest accrued for that period and a portion of the principal. The formula is M = P × r(1+r)^n / ((1+r)^n − 1), where P is the loan amount, r is the monthly interest rate, and n is the number of repayments. Because the outstanding balance decreases with each payment, the interest component of each payment shrinks over time while the principal component grows, this process is called amortisation. Loan type matters: personal loans typically run 1–7 years at 6–20% interest; car loans 3–7 years at 5–12%; mortgages 15–30 years at 3–8%. The total interest paid grows significantly with loan term, a 7-year loan at 8% costs roughly 2.4× more in interest than a 3-year loan for the same amount. Enter your loan details below to see monthly repayments, total interest, and a month-by-month amortisation breakdown.
Frequently Asked Questions
How is a monthly loan payment calculated?
Monthly loan repayments are calculated using the annuity formula: M = P × r(1+r)^n / ((1+r)^n − 1), where P is the principal, r is the monthly interest rate (annual rate ÷ 12), and n is the number of payments. This produces a fixed payment that covers the interest accrued during that month plus a portion of the principal. Early in the loan most of each payment is interest; over time more goes to principal. This gradual shift is called amortisation.
What is amortisation?
Amortisation is the process of paying off a loan through regular fixed payments over time. Each payment covers the interest for that period plus a portion of the outstanding principal. Because the principal decreases with each payment, the interest component of each subsequent payment also decreases, while the principal component increases, even though the total payment stays the same. An amortisation schedule (shown above) maps exactly how much of each payment goes to interest vs principal, and how the balance reduces month by month.
What is the difference between APR and interest rate?
The interest rate (or nominal rate) is the basic annual cost of borrowing the principal. The Annual Percentage Rate (APR) includes the interest rate plus any additional fees, application fees, annual account fees, mandatory insurance, expressed as a single effective annual rate. APR gives a more complete picture of the true cost of the loan. In most countries, lenders are legally required to disclose the APR so borrowers can compare products on equal terms. Always compare loans using APR rather than headline interest rate alone.
How does the loan term affect total interest paid?
Longer loan terms lower your monthly payment but significantly increase total interest paid. On a $30,000 loan at 7%: a 3-year term gives $927/month and $3,372 total interest; a 5-year term gives $594/month but $5,640 total interest; a 7-year term gives $450/month but $7,800 total interest. Choosing the shortest term you can comfortably afford is the most cost-effective approach. Making extra repayments on a longer-term loan gives you flexibility while still reducing total interest.
Should I pay monthly or bi-weekly (fortnightly)?
Bi-weekly payments reduce total interest because there are 26 fortnights in a year rather than 12 months, meaning you effectively make one extra monthly payment per year. On a $300,000 mortgage at 6% over 30 years, switching to fortnightly payments saves approximately $50,000–$60,000 in interest and cuts 4–5 years off the loan. For shorter personal loans (3–5 years), the saving is smaller but meaningful. Each fortnightly payment is exactly half the monthly amount, so you pay slightly more per year overall.
What happens if I make extra repayments?
Extra repayments reduce your principal faster, which reduces the interest charged in all subsequent periods. The saving is guaranteed and risk-free, paying off a 7% loan is equivalent to a guaranteed 7% after-tax return. Most variable-rate loans allow unlimited extra repayments; fixed-rate loans may have restrictions or break fees. On a $25,000 loan at 8% over 5 years, adding just $100/month extra saves approximately $1,400 in total interest and pays the loan off 9 months early.
What credit score do I need for a personal loan?
Requirements vary by lender and country, but generally: excellent credit (720+ FICO / 800+ Australian score) qualifies for the lowest rates; good credit (680–719 / 700–799) qualifies for competitive rates; fair credit (580–679 / 625–699) may still qualify but at higher rates; poor credit (below 580 / below 625) may be declined or face very high rates. Improving your score before applying, by paying bills on time, reducing credit card balances, and avoiding new credit applications, can significantly lower the rate you're offered. Many lenders offer pre-qualification checks that don't affect your credit score.