Every fixed-rate loan — personal loan, car loan, mortgage — uses the same amortization formula to calculate monthly payments. Understanding this formula shows you exactly what you're paying for and why making extra payments saves so much money.
The Loan Payment Formula
M = P × [r(1+r)^n] / [(1+r)^n − 1]
Where: M = monthly payment, P = loan principal (amount borrowed), r = monthly interest rate (annual rate ÷ 12), n = total number of payments (years × 12).
Example: £15,000 car loan at 6.9% APR for 48 months. r = 6.9% ÷ 12 = 0.575%. n = 48. M = 15,000 × [0.00575 × (1.00575)^48] ÷ [(1.00575)^48 − 1] = £356.55/month. Total repaid: £17,114. Total interest: £2,114.
How Amortization Works
In early payments, most of each payment covers interest rather than principal. As the loan progresses, more goes to principal. On a £15,000 loan at 6.9% over 48 months: payment 1 = £86 interest + £271 principal; payment 24 = £60 interest + £297 principal; payment 48 = £2 interest + £355 principal.
What Affects Your Monthly Payment
- Loan amount: Every £1,000 extra at 6.9% over 48 months adds approximately £24/month.
- Interest rate: Going from 6.9% to 9.9% on £15,000 over 48 months increases your payment from £357 to £375 and adds £864 in total interest.
- Loan term: Extending from 48 to 60 months reduces the monthly payment but increases total interest paid by approximately £700.
How to Pay Off a Loan Faster
Any payment above the required minimum directly reduces your principal. On the £15,000 loan above, adding just £50/month to your payment reduces the term from 48 to 41 months and saves approximately £450 in interest. Our loan calculator shows the exact impact of extra payments.
Flat Rate vs Reducing Balance Interest
The formula above uses reducing balance interest — interest is charged on the outstanding balance, which decreases each month. Some lenders (particularly for informal loans or hire purchase) use flat rate interest, where interest is charged on the original loan amount for the full term. Flat rate loans are significantly more expensive — a 6.9% flat rate is roughly equivalent to 12–13% reducing balance rate.
Calculate your exact monthly payment and total interest with our loan calculator.
Use the Loan Calculator →