How loan payments are calculated
- Your monthly payment is calculated using the standard amortization formula, based on the loan amount, monthly interest rate and number of payments.
- The payment amount stays fixed for the entire loan term — only the interest/principal split changes each month.
- A longer loan term lowers your monthly payment but increases the total interest you pay overall.
The amortization formula
Monthly payment = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the loan principal, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of monthly payments.
For example, a €20,000 loan at 6.5% APR over 5 years (60 payments) results in a monthly payment of roughly €392, with about €3,528 in total interest paid over the life of the loan.
What affects the rate you're offered
Lenders price a loan based on credit history, the loan term, whether it's secured against an asset, and current market rates. A shorter term usually gets a lower rate but a higher monthly payment; a longer term spreads the payment out but costs more in total interest, even at the same rate. Comparing offers by monthly payment alone can hide a much higher total cost — always check the total interest figure too.
The 6.5% APR above is an example, not a quote — actual rates vary by lender, credit profile and market conditions at the time you borrow.
The extra-payment mistake that quietly wastes money
Paying extra toward a loan only shortens it if that extra amount is actually applied to the principal. Some lenders default any overpayment to next month's scheduled payment instead — which pays down the balance a little sooner in theory, but doesn't reduce the interest the way a real principal payment does. If you're making extra payments to pay off a loan faster, confirm with your lender that the payment is specifically applied to principal, not just banked as a future payment.
Why two loans with the same interest rate can cost differently
Interest rate and APR are not the same number, and comparing offers by interest rate alone is a common mistake. The interest rate is just the cost of borrowing the principal; APR rolls in the lender's fees on top, which is why the APR is always the same or higher than the stated interest rate. A lender advertising a lower rate but charging higher upfront fees can end up costing more overall than one with a slightly higher rate and no fees. When comparing real offers, compare APRs, not the headline interest rate — that's the number that actually reflects the full annual cost of borrowing.
Two quick reference points
To get a feel for how the numbers scale: a $100,000 loan at a moderate rate over a standard term typically runs in the high hundreds of dollars per month, while a $3,000 loan over a short term is usually well under $200 a month — the loan amount matters far more to the payment size than small differences in rate. Run your own numbers above rather than assuming either example applies to your situation, since term length and rate both shift these figures meaningfully.