Loan payments: why the early years are almost all interest
A loan offer is almost always judged by its monthly payment. That is understandable, since it is the number that hits the budget each month. But the payment hides two things that cost a great deal more: how much of it is interest, and what stretching the term actually costs.
Updated: 2026-08-02
Annuity: constant payment, changing contents
Most consumer and home loans are annuity loans: the monthly payment is the same throughout. What changes is its composition. Interest is charged each month on the remaining balance, so early on, when the balance is large, the interest share is large and the principal share small.
Example: a 10,000 EUR loan at 9% over five years. The payment is 207.58 EUR. In the first month 75 EUR of that is interest and only 132.58 EUR reduces the debt. In the final month interest is about 1.55 EUR and the rest clears the balance.
The term costs more than the rate
A longer term lowers the payment and raises the total cost, often far more sharply than people expect.
- A 150,000 EUR home loan at 4.5% over 30 years: payment 760 EUR, total interest 123,610 EUR.
- The same loan over 20 years: payment 949 EUR, total interest 77,754 EUR.
- Paying 189 EUR more a month saves over 45,000 EUR in interest.
- A 10,000 EUR loan at 9% over 5 years: 12,455 EUR repaid, of which 2,455 EUR is interest.
The interest rate is not the whole price
Contract fees, monthly charges, insurance requirements and valuation costs do not appear in the interest rate. That is why offers should be compared on the annual percentage rate of charge, which folds those in, rather than on the headline rate alone.
A floating-rate loan adds one more variable: the base rate moves and the payment moves with it. For a home loan it is always worth working out what happens to the budget if the rate rises by a couple of percentage points.
Early repayment works in reverse
Because interest is charged on the balance, every extra principal payment is worth more the earlier it is made. The same amount paid in year one saves several times more interest than in the final year.
Before making a partial repayment, check the contract for whether the bank reduces the payment or shortens the term. Shortening the term usually saves more; reducing the payment gives more flexibility.
Look at your own schedule
The loan calculator shows the payment, the total cost and a month-by-month amortisation schedule, so the split between interest and principal is visible in black and white. The home loan calculator additionally handles the quirks of longer terms.