What this calculator does
A loan repayment is not simply the amount borrowed divided by the term. Interest is charged on the outstanding balance, so the payment is level while its composition shifts from interest to principal over time.
This calculator applies the standard amortising formula to give a periodic repayment, the total repaid and the total interest, for any fixed annual rate and repayment frequency.
How the calculation works
The annual rate is converted to a periodic rate by dividing by the number of payments per year. The term is converted to a number of payments in the same way.
The repayment formula then finds the level payment that clears the loan and all interest over that many periods. Total repayment is the payment multiplied by the number of payments, and total interest is that total minus the principal.
Worked example: 20,000 over five years at 7.5%
- 1Principal: 20,000.00
- 2Monthly rate: 7.5% ÷ 12 = 0.625%
- 3Payments: 5 × 12 = 60
- 4Repayment: 20,000 × 0.00625 ÷ (1 − 1.00625^−60) ≈ 400.76
The monthly repayment is about 400.76, total repayment about 24,045.60 and total interest about 4,045.60.
Common mistakes
- Comparing loans with different fees by monthly repayment alone rather than total cost.
- Using the annual rate as the monthly rate, which dramatically overstates the repayment.
- Assuming a fixed-rate result applies to a variable-rate loan.
- Forgetting that paying weekly or fortnightly changes the total interest, even at the same annual rate.