Loan Repayments: What the Interest Rate Hides
Two loans with the same monthly payment can differ by the price of a car in total interest. The term is where the money hides.
Lenders advertise the monthly payment because it is the number people can imagine. The number that matters is total interest paid over the life of the loan, and it is driven as much by the term as by the rate.
The annuity formula
A standard repayment loan uses:
payment = P × r / (1 − (1 + r)^−n)
where P is the principal, r the monthly interest rate (annual ÷ 12) and n the number of months. The loan calculator applies this and reports the monthly payment, the total repaid and the total interest, which is the figure to compare between offers.
Why the term dominates
Take 30,000 at 8%:
- Over 5 years: about 608 a month, roughly 6,500 in interest.
- Over 10 years: about 364 a month, roughly 13,700 in interest.
Halving the payment more than doubles the interest. A longer term is not cheaper; it is a smaller bill for longer, and considerably more money.
The front-loading effect
In the early years, most of each payment services interest, not principal. That is why an overpayment in year one removes far more total interest than the same amount in year eight, and why refinancing late in a term rarely pays off after fees.
What the rate leaves out
Compare APR, not the nominal rate: APR folds in arrangement fees, mandatory insurance and account charges. A 6.9% nominal loan with a 3% arrangement fee is more expensive than a 7.4% loan without one on a short term. Also check whether overpayment is allowed without penalty — for a long-term loan that clause can be worth more than a small rate difference.
Before you sign
Convert the payment into a share of net monthly income using the salary calculator, and stress-test it: if the rate is variable, recompute at three points higher. A loan that only works at today's rate is a loan you cannot afford.
FAQ
What is the difference between fixed and variable? Fixed locks the rate for a defined period; variable follows a reference rate and can rise.
Should I take the longest term and overpay? Often yes — it gives flexibility — but only if overpayment is penalty free.
Does the calculator include fees? It calculates the repayment; add fees separately when comparing total cost.
Keep reading
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- The Four Percentage Calculations People Get WrongA 20% fall followed by a 20% rise does not get you back to where you started. Four formulas fix most everyday percentage errors.