Loan calculator

A loan's monthly repayment depends on three things: the amount borrowed, the interest rate and the term. The standard method, used by almost every UK personal loan, charges interest each month on the balance still owed and sets one level instalment that clears the debt exactly at the end of the term. Borrowing £10,000 at 7% over 60 months gives a repayment of £198.01 a month and £1,880.75 of interest in total, and with no fees the APR is 7.23%. A longer term lowers the monthly figure but raises the total interest; a higher rate raises both. Fees paid at the start leave the instalment unchanged yet push the APR up, because less money reaches you for the same repayments. To run the sum the other way, from what you can afford each month to the largest loan it repays, switch the calculator to How much can I borrow.

A standard personal loan is repaid in equal monthly instalments, each covering that month's interest plus a slice of the principal, the sum originally borrowed. Borrowing £10,000 over 60 months at 7% produces a monthly repayment of £198.01. Across the full term that adds up to £1,880.75 of interest.

The split inside each instalment changes as the months pass, a process called amortisation. Interest is charged on whatever is still owed, so it is heaviest at the start: of the first £198.01, £58.33 is interest and only £139.68 reduces the debt. By the final year almost the whole instalment goes on the principal. The repayment schedule under the results shows that shift year by year.

The interest rate on a loan agreement is the nominal yearly rate used to work out each month's charge. The APR, the annual percentage rate of charge, turns the whole cost into one comparable annual figure. It accounts for interest being charged monthly and adds in any compulsory fees, which is why it is the figure lenders must quote and the one worth comparing.

Even with no fees at all the two differ. The example above, at 7%, has an APR of 7.23%, because monthly charging compounds over a year. Add an arrangement fee of £200 paid at the start and the monthly repayment stays exactly the same, yet the APR rises to 8.14%: the borrower receives less money while repaying the same amount.

What representative APR means

Loan adverts quote a representative APR. Under FCA rules at least 51% of successful applicants must be offered that rate or better, so up to the rest may be charged more. Most unsecured lending is priced by risk, and the rate actually offered depends on your credit score and circumstances, which is why a personalised quote can differ from the headline figure.

Unsecured personal loans in the UK are almost always taken on a fixed rate for their whole life. The monthly repayment agreed on day one is the one paid in the last month, whatever the Bank of England does with Bank Rate in between. Rate changes affect the price of new loans, not loans already running.

Some secured loans and most mortgages work differently, tracking Bank Rate or a lender's own variable rate once an initial deal ends. For those, the figures here describe the current rate only and would need recalculating after any change.

Almost every UK personal loan uses level repayments. The alternative, repaying an equal amount of capital each month, is more common in business lending and in several continental markets. Interest is still charged on the outstanding balance, so each instalment is a little smaller than the last.

Equal capital costs less in total because the debt shrinks faster, but it asks for the largest payments at the start, when budgets are usually tightest. Level repayments trade a slightly higher total for a predictable monthly outgoing.

The table keeps the amount and the rate fixed and changes only the term, so the effect of time on the cost stands on its own.

Stretching the term lowers the monthly repayment and raises the total interest, since the balance stays outstanding for longer. Over 84 months the same loan needs £150.93 a month but costs £2,677.77 in interest, compared with £1,880.75 over 60 months.

Lenders assess affordability before agreeing to lend, looking at income, committed outgoings and existing credit. Income here means what reaches your account, which the salary calculator works out from a gross salary. A longer term can make a repayment fit a budget, but the extra interest is the price of that breathing room.

The second mode answers the question a lender asks first: what repayment fits the budget. Enter the most that can go on the loan each month and the calculator solves the repayment formula backwards for the largest principal that budget clears over the term. At 7% over 60 months, £198 a month supports a loan of £9,999.39; stretched to 84 months the same budget reaches £13,118.94, at the cost of more interest.

With equal capital repayments the budget is matched against the first instalment, the largest one, so the loan comes out smaller. The result is what the arithmetic allows, not an offer: a lender also weighs income, existing commitments and the credit file when it assesses affordability.

The Consumer Credit Act gives borrowers the right to repay a regulated loan early, in full or in part, and interest for the remaining months falls away. On a fixed rate agreement the lender may charge compensation, but only where more than £8,000 is repaid early in any twelve months (section 95A). Even then it is capped at 1% of the amount repaid when over a year remains, or 0.5% in the final year.

Early settlement also triggers a statement of the settlement figure, which lenders must provide on request. Asking for one costs nothing and shows exactly what clearing the loan today would take.

Separately, most credit agreements carry a 14 day cooling-off period after signing (Consumer Credit Act, section 66A). Within it the borrower can withdraw without giving a reason, repaying the money together with interest for the days it was held.

Before lending, a lender checks your file with one or more of the three main credit reference agencies: Experian, Equifax and TransUnion. A quotation or eligibility check normally uses a soft search, which lenders cannot see. A full application leaves a hard search on your file, and several in a short period can weigh on lenders' decisions, since each one shows another request for credit.

Most personal loans are unsecured, meaning nothing is pledged against them. A secured loan borrows against a property, which usually brings a lower rate and much larger sums, but puts the home at risk if repayments are missed. The arithmetic of this page works the same for both.

Borrowing usually turns out dearer than planned because a comparison rests on the wrong figure or a cost stays out of view, as in these five cases.

1. Comparing loans by interest rate alone. The APR includes compulsory fees and is the figure lenders are required to show.
2. Choosing the longest term for the lowest repayment without checking what it adds to the total amount payable.
3. Assuming the representative APR will be the rate offered, when a large minority of applicants can be charged more.
4. Making several full applications in quick succession, each leaving a hard search on the file.
5. Overlooking the arrangement fee because it does not appear in the monthly repayment.