A loan calculator answers the question lenders phrase in the least useful way. An advertised rate tells you very little on its own; the monthly payment, the total interest, and how the two respond to a change in term are what actually determine whether a loan is affordable.
Almost all consumer loans are amortising: every payment covers the interest accrued that month, and whatever is left reduces the principal. Because interest is charged on the remaining balance, early payments are mostly interest and later ones are mostly principal — which is why paying a loan off halfway through does not halve the interest you pay.
The amortisation formula
The monthly payment is M = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1], 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. It looks forbidding, but it is doing something simple: finding the fixed payment that brings the balance to exactly zero on the final month.
How term length changes the picture
| Term on $20,000 at 7% | Monthly payment | Total interest |
|---|---|---|
| 3 years | $617.54 | $2,231 |
| 4 years | $478.92 | $2,988 |
| 5 years | $396.02 | $3,761 |
| 7 years | $301.78 | $5,350 |
What to check before signing
- APR, not the headline rate: APR folds in fees and is the only figure that compares two offers honestly.
- Early repayment penalties: some lenders charge for clearing the balance ahead of schedule, which cancels the benefit of overpaying.
- Origination or arrangement fees: often deducted from the amount advanced, so you receive less than you borrowed while paying interest on the full figure.
- Variable versus fixed: a variable rate can be cheaper today and unaffordable in two years.
- Payment protection add-ons: frequently expensive relative to the cover provided, and rarely compulsory.
Why overpaying early works so well
An extra payment made in the first year removes principal that would otherwise have accrued interest for the entire remaining term. The same payment made in the final year saves almost nothing, because there is barely any interest left to avoid. On a five-year loan, a single extra monthly payment in month two can save several times its own value in interest. If you can overpay, do it as early as the agreement allows.
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