Loan payments and APR, explained with the calculator

Why you’d do this

A loan offer usually arrives as a single friendly number: “pay only 1,887 a month” or “rates from 3% flat”. Both are true and neither tells you what the loan costs. Two offers can have the same monthly payment and very different total costs, and two offers with the same advertised rate can be priced very differently if one is quoted as a flat rate and the other as an annual rate on the declining balance.

Working the numbers yourself takes a few minutes and answers three questions: what is the payment, how much interest do I pay in total, and what is the real annual rate behind a flat-rate ad.

How, with the named tool

Loan & Interest Calculator runs on your device. It has three tabs, Loan, Savings and Flat → APR. For this guide you need the first and the last.

Work out a normal loan.

1. Open the Loan tab.
2. Enter Principal, Annual rate % and Term (years). The optional Currency label is text only. No exchange rate is applied.
3. Read Monthly payment, Total interest and Total paid. They update as you type.
4. Open Amortization schedule to see the Payment, Principal, Interest and Balance for every month.

For a principal of 100,000 at 5% a year over 5 years, the tool gives a payment of about 1,887.12, total interest of about 13,227.40 and a total paid of about 113,227.40. At 8% over the same 5 years the payment becomes about 2,027.64 and the interest about 21,658.37. Stretch the 5% loan to 10 years and the payment drops to about 1,060.66, but the interest roughly doubles to about 27,278.62. That is the trade-off the monthly figure hides.

The formula, in words. Each month the rate is the annual rate divided by 12. The payment is chosen so that, if you pay the same amount every month, the balance reaches exactly zero at the end of the term. Concretely, it is the principal times the monthly rate, divided by one minus (one plus the monthly rate) raised to the power of minus the number of months. With a rate of 0% the payment is just principal divided by months.

The schedule shows the effect. In month 1 of the example above, interest is the balance times the monthly rate: 100,000 × 5% ÷ 12, or about 416.67. The rest of the payment, about 1,470.46, reduces the principal. Next month interest is charged on the smaller balance, so a little more of the same payment goes to principal. Early payments are mostly interest, and later ones mostly principal.

Check a flat-rate advert. Open Flat → APR, enter Principal (it does not change the answer), Flat rate % and Term (years). Above the payment figures the tool shows Approximate reducing-balance APR. A flat rate charges interest on the original amount for the whole term: principal plus principal × rate × years, split into equal monthly payments. But you are repaying the principal every month, so you owe less each month and the flat rate overstates how little you pay. A 5% flat rate over 5 years means payments of about 2,083.33 on a 100,000 loan, which is equivalent to about 9.15% a year on the declining balance. A 3% flat rate over 5 years comes out around 5.64%. The tool’s own note says: banks advertise flat rates; the true cost is higher.

Use the Percentage Calculator for the side questions. In X is what % of Y, put total interest in Part and the principal in Whole to see how much extra you pay as a percentage of what you borrowed. In % change, put one offer’s total in From and the other’s in To to see the signed difference, labelled increase or decrease. Copy link to this result gives you a link that reproduces the same calculation.

What to watch for

Principal and interest only. The calculator does not include bank fees, insurance, administrative charges or early-repayment terms. The real cost of an offer can be higher than any figure here, so ask the lender for the full list of charges and compare it against the calculator’s numbers.

The monthly figure is not the cost. A longer term lowers the payment and raises the total. Compare Total paid, not only Monthly payment.

The flat-to-APR figure is approximate. It assumes equal monthly payments over the term and no fees. A lender’s own quoted annual percentage rate may include charges this tool leaves out, so the two figures can differ.

Enter an annual rate and a term in years. The tool converts the term to months. If an offer is quoted monthly, convert it first.

This is an estimate, not advice. The tool is for information only and is not financial advice. It does not know your income, your other debts or your lender’s terms. For a decision, ask the lender for a written breakdown and, if you are unsure, an independent adviser.

FAQ

What is the difference between a flat rate and APR?

A flat rate charges interest on the original loan amount for the whole term, even though you pay the loan down every month. An annual rate on the declining balance charges interest only on what you still owe. The same loan therefore looks cheaper under a flat rate. Flat → APR shows the approximate declining-balance rate behind an advertised flat figure.

Why is so much of my first payment interest?

Interest is charged on the balance, and the balance is highest at the start. As each payment reduces the principal, the interest portion shrinks and the principal portion grows. Open Amortization schedule to see every month.

Can I rely on the result to choose a lender?

Treat it as a way to compare and ask better questions, not as a quote. Fees and insurance are not included, so the lender’s written offer is what counts. This is an estimate, not advice.