Loan Repayment Calculator

Our loan repayment calculator will ask for three things. The loan amount, duration and the interest rate. Hit 'Calculate' and your loan repayment amount will appear on screen.

Luis Anaya

Luis Anaya

15 Jan 2021

Loan Repayment Calculator

This loan calculator works out the rough monthly payment you will make on a personal loan or mortgage. The payment amount will rarely match the one provided by a bank. There are many reasons for this. Firstly, banks can add an administration fee. The first payment can be larger than later payments. The loan rate can be different to the advertised rate, based on your circumstances. Finally some banks may offer a discount when working out your repayments.

Banks must show an APR, or Annual Percentage Rate. The APR is the yearly interest when all charges are included. The APR is good for comparing offers from many banks because it includes costs such as fees that differ from one bank to another.

inputs
results
Monthly Payment (£)
0
Loan Interest (£)
0
Total Loan Repayment (£)
0
MonthPaymentPrincipalInterestBalance
1150012003003000
2150012003001500
3150012003000

How Are Loan Payments Calculated?

When you take out a loan you commit to repay two things. These are the initial loan amount and an extra amount known as interest. Lenders offer loans at either fixed interest rates or variable interest rates. Fixed rates stay the same for the life of the loan. Variable rates can go up or down. Variable rates usually follow Bank of England interest rates. A loan repayment is calculated by multiplying the loan by the interest rate.

When repaying a loan, if the interest amount is repaid each period, such as each month, but no more than the interest amount then nothing is being repaid against the original loan amount. Therefore a borrower could make interest payment for 1 year, 5 years or 20 years and the amount owed would never go down.

If less than the interest due is paid, the difference between the interest due and the interest paid is added to the loan amount. Each time such an underpayment occurs the loan amount, or debt, increases. Repayments can become hard to manage because the interest for the next month will be calculated on a larger loan amount. This means the next interest payment will be larger than the last. A vicious cycle can ensue where loan repayments get harder over time.

When a loan repayment is more than the interest incurred the loan amount shrinks. The interest gets paid off for the current payment period and so is some of the initial loan amount. When the loan amount becomes smaller the interest calculated for the next period will be lower. This creates a virtuous cycle where loan repayments become smaller over time as long as the interest rate remains the same.

Fixed Rate vs Variable Rate Loans

Loan rates can go up or down. If wages, shopping prices and house prices are going up quickly the Bank of England might raise rates to prevent inflation. On the other hand, rates might go down to help the economy if there is a recession.

When taking out a loan a currently available interest rate is used to calculate future loan repayments. Over the course of the loan, if interest rates rise then so will loan repayments. This means there is a risk that loan repayments can become less affordable if interest rates rise too much.

If a borrower worries that their repayments might become unaffordable they can choose a loan with a fixed interest rate. This shifts the risk of an interest rate rise to the lender. Lenders charge a higher rate of interest on fixed rate loans than on variable rate loans.

A borrower who is not worried about their repayments increasing due to an interest rate rise may prefer the cheaper variable rate loan. On day one their loan is cheaper. They accept that their repayments might increase at a later date. Other borrowers might prefer to gamble that interests will fall. In this case they will take out a variable rate loan. Their hope is that interest payments will fall over time due to falling interest rates.

Why Is Interest Charged On Loans?

When you go to the shop you can only take your items home if you pay for them. The money you pay has to cover costs such as farming, transport, property and staff as well as a profit for share holders.

Just like the shop, a bank has property costs, staff costs, IT costs and share holders who demand a profit. When writing a loan the bank charges a interest to generate interest payments. Those interest payments are the cost of the loan to you. Just like the cost of shopping, they pay for the bank's costs and create share holder value.

Secured Loan Repayments vs Unsecured Loan Repayments

A secured loan is secured against collateral put up by the borrower. Collateral could be a house or a car. If the borrower cannot make their loan payments, the lender can claim against the asset that was put up as collateral.

An unsecured loan does not require the loan to be secured against an asset. Risk is shifted to the lender. If the borrower cannot pay their loan repayment, the lender has no claim on an asset to compensate their loss.

This means unsecured loans have higher rates. This makes for higher loan payments as well.

Secured Loans vs Mortgages

A mortgage is one type of secured loan that is for purchasing property. It tends to be a long term loan, such as 25 years.

Some mortgages have two payment options. One is to pay both the capital and interest with each repayment. The other is to pay only the interest.

An interest only mortgage needs a lot of thought. At the end of the mortgage the borrower will have repaid large amounts in interest. However, they will still owe the entire value of the initial loan amount. Often some form of investment will be setup at the same time as an interest only mortgage. The idea is to grow an investment that is worth at least the the original loan amount at the end of the mortgage. It could then be used to repay the loan at the end of the mortgage.

Why Is It Important To Calculate Monthly Interest Repayments?

This loan calculator shows you how affordable a loan will be. By trying different input values you can check whether a loan will be affordable if interest rates go up. Or you can check whether taking a loan over more years will make it more affordable.

These checks are important. If a borrower cannot afford their loan they risk losing the asset against which it is secured, eg a house. They can also incur harm their credit rating, which hinders their ability to get loans in the future.

How Does The Length Of A Loan Impact The Size Of Each Repayment?

Loans are usually taken over a number of years with monthly repayments. Therefore a loan taken over 5 years will have 60 repayments since there are 12 months per year. A 10 year loan would have 120 monthly repayments.

When the loan amount is repaid is over more months, each payment is smaller.

However, the longer term loan will incur more interest. This is because the loan is being paid back more slowly. The longer term loan costs less each month, but it costs more overall.

FAQs

Have a question about our this calculator? See our list of frequently asked questions below.

How are loan repayments calculated?
Loan repayments are calculated by dividing the amount of loan that is outstanding by the number of repayments that are left to make, plus the interest incurred in the current payment period.
How are loan interest payments calculated?
Interest amount = Loan amount * Interest rate.
How does the length of a loan impact the size of each repayment?
Each repayment is smaller because the loan amount is spread over more repayment periods.
Which financial products have interest repayments?
{Secured loans, unsecured loans, mortgages, credit cards, car loans}.

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