How loan repayments are calculated
Most personal loans, car loans and mortgages are amortising loans: you repay them in equal monthly instalments over a fixed term. Each instalment pays the interest due that month first, and whatever is left reduces the outstanding balance. Because the balance shrinks over time, a growing share of every payment goes towards the loan itself rather than interest.
The monthly payment formula
The fixed monthly payment is found with the annuity formula
M = P · r / (1 − (1 + r)⁻ⁿ), where P is the
amount borrowed, r is the monthly interest rate (the
annual rate divided by twelve) and n is the number of
monthly payments. If the interest rate is zero, the payment is simply
the amount divided by the number of months.
Total cost and total interest
The total repaid is the monthly payment multiplied by the number of payments. The total interest is that total minus the amount you originally borrowed — in other words, the price of the credit.
Figures are estimates and assume a fixed rate with no fees, missed payments or overpayments. Always check the lender's own illustration before borrowing.