Loan Calculator UK

The amortisation formula

A fixed-rate loan is repaid in equal monthly instalments that cover that month's interest plus a slice of the capital, with the interest slice shrinking as the balance falls. The monthly payment comes from M = P × r ÷ (1 − (1 + r)^−n), where P is the amount borrowed, r the monthly interest rate and n the number of payments. Borrow £10,000 at 6% a year over three years and the payment is about £304.22 a month: £10,951.90 in total, of which £951.90 is interest.

Early payments are mostly interest — on that example, the first month's payment contains £50 of interest and £254 of capital — while later payments are mostly capital. That is why paying extra early, when the balance is highest, saves more interest than the same extra payment made near the end of the term, and why lenders' early-repayment charges exist.

Term length: the monthly-versus-total trade-off

Stretching a loan over more years always lowers the monthly payment and always raises the total interest — there is no free lunch in the other direction. The same £10,000 at 6% costs about £304 a month over three years (£952 interest) but about £193 a month over five years (£1,600 interest). The longer term feels easier month to month and costs roughly two-thirds more in interest.

The right term is usually the shortest one whose payment you can comfortably afford every month, including in a bad month. Lenders assess affordability on that basis too, and a payment that only works if nothing goes wrong is a payment that will go wrong. If a shorter term is unaffordable, borrowing less is usually safer than borrowing longer.

Rate, APR and fees — reading the real price

The calculator takes a nominal annual rate, but the figure lenders must advertise is the APR, which folds in most compulsory fees and is therefore the honest number for comparing loans. A loan advertised at 6% with a large arrangement fee can cost more than a 6.5% loan with no fee, and the APR is designed to expose exactly that. Always compare APRs, not headline rates.

Also check whether the rate is fixed or variable. A fixed rate locks the payment for the term; a variable rate can rise, and the calculator's figure then becomes a starting point rather than a promise. Some loans also charge for overpayments or early settlement, which changes the maths of paying off early — read those terms before you borrow, not after.