How to use it
- Enter the amount you want to borrow.
- Enter the annual interest rate and the loan term in years or months.
- Check the monthly payment, total interest and the schedule, which shows how each payment is split between interest and principal.
The formula
Payment = P × i ÷ (1 − (1 + i)^−n)
P is the loan amount, i the monthly rate (annual rate ÷ 12) and n the number of monthly payments. At 0% the payment is simply P ÷ n.
Worked example
Borrow 20,000 at 7% a year for 5 years (60 payments).
Monthly rate i = 0.07 ÷ 12 ≈ 0.5833%.
Payment ≈ 396.02 a month, total paid ≈ 23,761.44, of which ≈ 3,761.44 is interest.
Assumptions
- The rate is fixed and stated as a nominal annual rate, compounded monthly.
- Payments are equal and monthly; the last one clears any rounding difference.
- Arrangement fees, insurance and late-payment charges are not included.
Common mistakes
- Comparing loans by monthly payment alone. A longer term lowers the payment but raises total interest.
- Confusing a flat rate with an annual (reducing-balance) rate. Some lenders quote flat rates, which cost much more than the same number as an APR.
- Ignoring fees that the lender adds to the loan amount.
Questions
Why does most of the early payment go to interest?
Interest is charged on the remaining balance, which is highest at the start. As the balance falls, more of each payment repays the loan itself.
My lender quoted a "flat" rate. Can I use it here?
Not directly. A flat rate charges interest on the original amount for the whole term. Ask the lender for the APR (annual percentage rate) and enter that.
Does this work for Islamic (murabaha) financing?
If the provider states an equivalent annual profit rate and equal monthly instalments, the arithmetic is the same. The contract terms decide what you actually pay.
Estimates only. Your actual figures depend on the provider’s terms.