Loan calculator - payment and interest

Example: a 15,000 EUR loan at 8.5% over five years

Take the calculator's default values and walk through the calculation step by step. The annual rate of 8.5% is split into months: 8.5 ÷ 12 = roughly 0.708% per month. The term is 5 × 12 = 60 months. The annuity formula gives a monthly payment of 307.75 EUR.

Interest for the first month is charged on the full amount: 15,000 × 0.085 ÷ 12 = 106.25 EUR. The remaining 201.50 EUR reduces the principal, and the balance drops to 14,798.50 EUR. In month two, interest is charged on the smaller balance, so the interest part shrinks and the principal part grows while the payment itself stays the same.

By the end of year one the balance is 12,485.56 EUR. So 12 payments, or 3,693 EUR, have reduced the debt by only 2,514.44 EUR, and about 1,178.52 EUR went on interest. Half of the loan is repaid only in month 34, not month 30 as you might assume. In total you pay 18,464.88 EUR, of which 3,464.88 EUR is interest.

What the term does to the cost: three comparisons

The term is the setting people change most often, because it lowers the payment fastest. The figures below were run through the calculator and show what that does to the total cost.

• 5,000 EUR at 12% over two years: payment 235.37 EUR, total interest 648.82 EUR. The same loan over four years: payment 131.67 EUR, interest 1,320.12 EUR. The payment falls by 103.70 EUR, the interest cost doubles.
• 15,000 EUR at 8.5% over three years: payment 473.51 EUR, interest 2,046.47 EUR. Over five years: payment 307.75 EUR, interest 3,464.88 EUR. The two extra years cost about 1,418 EUR.
• 20,000 EUR at 9.9% over seven years: payment 330.99 EUR, total interest 7,803.26 EUR. Nearly 39% of the loan amount goes on interest, even though the payment looks moderate.

How to read the result rows

The monthly payment is what has to leave your account every month. Total repaid is that payment multiplied by the number of months, and total interest is that sum minus the loan amount. The bar above the rows shows the same split visually: the larger the red part, the more of your payments is the price of the loan rather than paying it back.

The schedule columns show the principal, the interest and the remaining balance for each month. The balance column is useful if you are thinking of repaying early at some point: look up the balance right after that month. The final row may differ by a few cents, because the calculator settles the rounding difference there.

What the calculator leaves out

The calculation uses only the loan amount, the nominal rate and the term. Contract fees, monthly service charges, mandatory insurance or collateral valuation costs are not included. Two offers can therefore show the same payment here and still cost different amounts. To compare offers, use the annual percentage rate of charge (APRC), which folds those costs in.

The calculator assumes a fixed rate for the whole term and equal (annuity) payments. For a floating-rate loan the result holds only until the rate changes. With an equal-principal schedule the first payments are larger than an annuity and the last ones smaller, so this calculator does not describe that type of loan exactly. A bank may also charge interest by actual days, which can move the schedule by a few cents.

Common mistakes when working out a loan

Wrong conclusions rarely come from the formula itself; they come from the inputs or from how the result is read. Before deciding, try at least two terms and see how much interest each extra year adds.

• Entering a monthly rate in the annual rate field. If an offer says 1% per month, the annual rate is 12%, not 1%.
• Comparing only the monthly payment. A lower payment over a longer term almost always means a more expensive loan, as shown above.
• Treating a 0% offer as a free loan. 8,000 EUR at 0% over four years gives a payment of 166.67 EUR, but if the contract has fees, the real cost is not zero.
• Entering the loan amount without knowing whether the lender adds its fee to the balance. That changes both the payment and the interest.