Finance⏱ 5 min read
How to Calculate Loan Repayments for Any Loan
The monthly repayment formula for loans looks complex, but it follows a consistent pattern. Here's how to calculate repayments from scratch, compare total costs, and understand what early repayment saves.
Whether you're comparing car finance deals, personal loans, or trying to understand a mortgage offer, the ability to calculate repayments yourself gives you a significant advantage over just accepting what a lender tells you.
The Monthly Repayment Formula
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n − 1]
P = Principal (loan amount)
r = Monthly interest rate (annual rate ÷ 12)
n = Number of monthly payments (years × 12)
Example: £15,000 car loan at 7.9% APR over 4 years
P = 15,000
r = 7.9% ÷ 12 = 0.658% = 0.00658
n = 4 × 12 = 48 months
Monthly = 15,000 × [0.00658 × (1.00658)^48] / [(1.00658)^48 − 1]
= 15,000 × [0.00658 × 1.3704] / [1.3704 − 1]
= 15,000 × 0.009017 / 0.3704
= 15,000 × 0.02435
= £365.22/month
Total Interest Paid
Total repaid = Monthly payment × n
Total interest = Total repaid − Principal
Example continued:
Total repaid = £365.22 × 48 = £17,530.56
Total interest = £17,530.56 − £15,000 = £2,530.56
The £15,000 car loan cost £2,530 in interest over 4 years.
How Loan Term Affects Total Cost
TermMonthly PaymentTotal InterestTotal Cost
2 years (24 months)£680.50£1,332£16,332
3 years (36 months)£470.18£1,926£16,926
4 years (48 months)£365.22£2,531£17,531
5 years (60 months)£303.78£3,227£18,227
Stretching from 3 to 5 years reduces monthly payments by £166 but costs an extra £1,301 in total interest. This is the core trade-off of all credit decisions.
The Impact of Interest Rate
APRMonthly PaymentTotal InterestDifference vs 5%
5.0%£345.44£1,581—
7.9%£365.22£2,531+£950
12.0%£395.02£3,961+£2,380
18.0%£441.58£6,196+£4,615
The difference between a 5% loan and 18% loan on £15,000 over 4 years is £4,615 — on the same product.
Early Repayment
If you overpay or settle early:
Outstanding balance at month m = P × [(1+r)^n − (1+r)^m] / [(1+r)^n − 1]
After 24 months on the 4-year loan:
Balance = 15,000 × [(1.00658)^48 − (1.00658)^24] / [(1.00658)^48 − 1]
= 15,000 × [1.3704 − 1.1707] / [0.3704]
= 15,000 × 0.5390 = £8,085
Settling at month 24 saves all remaining interest on £8,085.
Check for early repayment charges (usually 1–2 months' interest) —
often worth paying to escape a high-rate loan.