What the credit actually costs
The instalment tells you what leaves your account. It does not tell you what the loan costs. This calculator separates the two: the money you borrowed, and the money you pay for the privilege of borrowing it.
On the default scenario the difference is stark enough to change a decision. Seeing it as a single figure, rather than as a payment spread over years, is usually the point at which people reconsider the term.
The formula behind the number
An amortising loan is repaid in equal instalments. Each one covers the interest that accrued since the last payment, and whatever is left reduces the balance. The instalment that brings the balance to exactly zero on the final payment is:
Here P is the amount borrowed, i is the monthly rate (the annual rate divided by 12) and n is the number of payments. Nothing else enters the calculation, which is why two lenders quoting the same three inputs must arrive at the same instalment.
Worked example: $10,000 at 9% over 4 years
The calculator opens on this scenario, so you can follow every step:
- Amount borrowed: $10,000
- Annual rate: 9%, so the monthly rate is 9 ÷ 12 = 0.7500%
- Term: 4 years, so n = 4 × 12 = 48 payments
Paying $248.85 every month for 48 months comes to $11,945. Subtract the $10,000 you actually borrowed and the cost of the credit is $1,944.82, or 19% of the sum borrowed.
Where each payment goes
The instalment never changes, but its composition does. The first payment carries $75.00 of interest and only $173.85 of principal. By payment 24 the split has moved to $42.40 interest against $206.45 principal.
| Payment | Instalment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $248.85 | $75.00 | $173.85 | $9,826.15 |
| 2 | $248.85 | $73.70 | $175.15 | $9,651.00 |
| 3 | $248.85 | $72.38 | $176.47 | $9,474.53 |
| 24 | $248.85 | $42.40 | $206.45 | $5,447.12 |
| 48 | $248.85 | $1.85 | $247.00 | $0.00 |
Interest is charged on the balance outstanding, not on the original amount. That is why the interest column shrinks every month even though the rate never moves.
What moves the answer most
Two levers change the total, and they do not pull with equal force.
Add one percentage point to the rate and the instalment goes from $248.85 to $253.63, which is $229.22 more over the full term. Cut 1 year off the term instead and the instalment rises to $318.00, but total interest falls from $1,944.82 to $1,447.90. Interest is roughly proportional to how long the money is outstanding, so shortening the term is the most direct way to cut it.
What this calculator leaves out
This is simple amortising interest. Credit cards, overdrafts and payday products compound differently and often carry a much higher effective rate than their headline figure suggests.
Related calculators
- Credit card interest calculator — compounds on the balance rather than amortising
- APR calculator — the comparable rate once fees are included
- Simple interest calculator — for loans where interest is not amortised