How loan payments are worked out
Most personal loans, car loans and mortgages are amortizing: you pay the same amount each month, and each payment covers that month's interest first, with the rest reducing the balance. The formula is:
Payment = L × r ÷ (1 − (1 + r)−n)
where L is the amount borrowed, r is the monthly interest rate (APR ÷ 12 ÷ 100) and n is the number of monthly payments. Early on most of each payment is interest; by the end it's almost all principal. The yearly table above shows that shift.
Why overpaying saves so much
Every extra payment goes straight to the balance, so it stops interest building on that money for the rest of the loan. On a 15,000 loan at 7.9% over 5 years, an extra 50 a month saves several months of payments and a noticeable chunk of interest. Try it above with your own numbers.
Before overpaying, check your agreement: some loans and mortgages charge an early repayment fee or cap how much you can overpay each year without a penalty.
APR vs interest rate
The APR (annual percentage rate) includes the interest rate plus most compulsory fees, spread over the term, so it's the fairer number for comparing loans. A loan with a lower interest rate but a big arrangement fee can have a higher APR than one with no fee. Use the APR here for the most realistic total cost.
FAQ
Does a longer term cost more?
Usually yes. A longer term lowers the monthly payment but you pay interest for longer, so the total cost goes up. Compare a few terms above to see the trade-off.
Can I use this for a mortgage?
Yes, for a repayment mortgage at a fixed rate. For a fixed period followed by a different rate, calculate each period separately.