How Is a Loan Repayment Calculated?
Monthly repayments use the standard amortization formula: M = P[r(1+r)^n] / [(1+r)^n−1], where P is the principal, r is the monthly interest rate, and n is the total number of payments. Each payment covers the interest accrued that month first, with the remainder reducing the principal balance.
This means early payments are mostly interest — on a $20,000 loan at 8% over 5 years, roughly 60% of your first payment goes to interest. By the final year, that ratio flips and most of each payment is paying down principal.
How to Get a Lower Interest Rate
Your interest rate is primarily determined by your credit score and loan term. Borrowers with scores above 720 typically qualify for the lowest rates. Shopping at least 3 lenders before accepting an offer can save hundreds or even thousands in total interest. A shorter loan term also reduces the rate a lender offers, since there is less time for risk to accumulate.
Frequently Asked Questions
How is my loan repayment calculated? +
Monthly repayments use the standard amortization formula. Each payment covers the monthly interest on the outstanding balance, with the remainder reducing the principal. Over time, the interest portion decreases and the principal portion increases — this is why early payments are mostly interest.
Should I choose a shorter or longer loan term? +
Shorter terms mean higher monthly payments but significantly less total interest. Longer terms reduce monthly payments but you pay more overall. For example, a $20,000 loan at 8% costs $406/month over 5 years ($4,360 total interest) versus $243/month over 10 years ($9,160 total interest). Use this calculator to compare your specific scenarios.
What is a good personal loan interest rate in 2026? +
Personal loan rates in the US range from 6% to 25%+ depending on your credit score and lender. Borrowers with 720+ credit scores can often get rates under 10%. Rates above 20% are generally high-cost — if you're being quoted above 18%, consider credit unions, 0% balance transfer cards, or building credit first before borrowing.
Does making extra payments save money? +
Yes — every extra dollar paid toward principal directly reduces your total interest cost. On a $15,000 loan at 10% over 5 years, paying an extra $100/month saves approximately $800 in interest and pays off the loan 14 months early. Check the "Extra Payment" field in the calculator above to model your specific savings.
What is the difference between APR and interest rate? +
The interest rate is the base cost of borrowing. APR (Annual Percentage Rate) includes the interest rate plus fees — origination fees, closing costs, and other charges — expressed as a yearly rate. APR is the more accurate comparison tool when evaluating loan offers: a loan with a lower interest rate but high origination fee may cost more than a slightly higher rate with no fees.
Should I pay off debt or invest? +
The general rule: if your loan interest rate is higher than your expected investment return (typically 7% for a diversified stock portfolio), pay off debt first. If your rate is below 5%, the math usually favors investing — especially if you have employer 401(k) matching. At 5–7%, it's a judgment call that depends on your risk tolerance and financial security. See our
debt payoff strategy guide for more detail.