How a fixed-rate loan works
Most UK personal loans and car finance agreements are repayment loans with a fixed interest rate: you borrow a lump sum and repay it in equal monthly instalments over an agreed term. Each instalment covers that month's interest plus a slice of the capital (the amount you borrowed).
Because interest is charged on the balance still owed, the early payments are mostly interest and the later payments are mostly capital. This gradual paying-down is called amortisation, and the schedule produced by this calculator shows it month by month.
APR versus the monthly interest rate
Lenders in the UK must quote an APR (Annual Percentage Rate). The APR is an effective annual rate: it describes the total yearly cost of the credit, including compounding and any compulsory fees the lender builds in. Adverts must show a representative APR, which at least 51% of successful applicants receive; the rate you are personally offered can be higher.
Repayments are made monthly, so the calculator needs a monthly rate. Simply dividing the APR by 12 slightly overstates the cost. Instead, it uses the monthly rate that compounds to exactly the APR over a year:
Monthly rate = (1 + APR) ^ (1/12) − 1
For an APR of 7.9%, that is 1.079 ^ (1/12) − 1 = 0.6356% per month, compared with 7.9 ÷ 12 = 0.6583% if you divided naively.
The repayment formula
The fixed monthly repayment is found with the standard annuity formula:
Repayment = P × r ÷ (1 − (1 + r) ^ −n)
where P is the loan amount, r is the monthly rate and n is the number of monthly payments (years × 12). If the APR is 0%, the repayment is simply P ÷ n.
Each month: interest = balance × r; capital repaid = repayment − interest; new balance = old balance − capital repaid. The final payment is adjusted by a few pence so the balance ends at exactly zero.
Worked example 1: £10,000 over 3 years at 7.9% APR
Loan £10,000, term 3 years (36 payments), APR 7.9%
Monthly rate = 1.079 ^ (1/12) − 1 = 0.6356%
Monthly repayment = £311.65
Month 1: interest = £10,000 × 0.6356% = £63.56; capital repaid = £311.65 − £63.56 = £248.09; balance £9,751.91
Month 2: interest £61.99; capital £249.66; balance £9,502.25
Total repaid = £11,219.35, of which £1,219.35 is interest
Worked example 2: the same loan over 5 years
Loan £10,000, term 5 years (60 payments), APR 7.9%
Monthly repayment = £200.99 (£110.66 a month less than over 3 years)
Total repaid = £12,059.19
Total interest = £2,059.19, which is £839.84 more than the 3-year loan
Lesson: a longer term makes each payment more affordable but increases the total cost of borrowing.
Worked example 3: £20,000 car loan at 6.5% APR
Loan £20,000, term 5 years, APR 6.5%
Monthly rate = 1.065 ^ (1/12) − 1 ≈ 0.5262%
Monthly repayment = £389.58
Month 1: interest £105.23, capital £284.35, balance £19,715.65
Total repaid = £23,374.99; total interest = £3,374.99
How the amount, APR and term change the cost
Small differences in APR matter, and so does the term. The table shows figures from this calculator:
| Loan | Term | APR | Monthly repayment | Total interest |
|---|---|---|---|---|
| £5,000 | 2 years | 12.9% | £235.82 | £659.74 |
| £10,000 | 3 years | 7.9% | £311.65 | £1,219.35 |
| £10,000 | 5 years | 7.9% | £200.99 | £2,059.19 |
| £10,000 | 3 years | 0% | £277.78 | £0.00 |
| £20,000 | 5 years | 6.5% | £389.58 | £3,374.99 |
Fees, overpayments and early settlement
- Arrangement and broker fees are not added by this calculator. If a fee is compulsory, the lender must include it in the APR; enter that APR and the amount you actually receive, or add the fee to the loan amount if it is added to the balance.
- Early settlement: under the Consumer Credit Act you can repay a regulated loan early at any time. The lender may charge up to 1% of the amount repaid early (0.5% if less than a year remains), and you save the interest you would have paid.
- Overpayments reduce the balance immediately, so the interest charged in every later month falls.
- Payment protection insurance or optional extras increase the cost and are not included.
- Hire purchase and PCP car finance include balloon payments, deposits and option fees, so a simple loan calculation will only approximate them.
Common mistakes when comparing loans
- Comparing monthly payments only. A lower monthly payment over a longer term usually means paying more interest overall; compare the total amount repaid.
- Assuming you will get the advertised rate. The representative APR is only guaranteed to 51% of successful applicants. Use the personalised rate from an eligibility checker.
- Dividing the APR by 12. This slightly overstates the monthly rate and the repayment.
- Forgetting rate bands. Many UK lenders offer their lowest APRs only for loans between about £7,500 and £25,000; borrowing a little more can sometimes cost less.
- Borrowing to consolidate without a plan. A consolidation loan only saves money if the new APR and term really are better and the old debts are not built up again.