Understanding how loan repayments work is essential before you borrow. Whether you’re taking out a personal loan, car finance, or mortgage, the mechanics are the same.
This guide breaks down UK loan repayments simply, using clear examples you can model yourself.
What makes up a monthly repayment?
Every monthly payment contains two parts:
- Principal – the amount you borrowed
- Interest – the cost of borrowing
These combine into a single fixed monthly payment (unless you have a variable-rate loan).
Most UK lenders use amortisation, which means you pay more interest at the start and more principal later. As the loan progresses, the balance shifts—each payment chips away more of what you owe.
Understanding this helps you see exactly where your money goes. Use a loan calculator to visualise how principal and interest change over your loan term.
Real example: £10,000 loan at 6.9% APR
Here’s what a typical UK personal loan looks like:
| Detail | Amount |
|---|---|
| Loan amount | £10,000 |
| APR | 6.9% |
| Term | 36 months |
| Monthly payment | £308.47 |
| Total repaid | £11,104.92 |
| Total interest | £1,104.92 |
Over 36 months, you’ll pay £1,105 in interest. The APR includes any fees the lender charges, giving you the true cost of borrowing.
Try this example yourself and explore how different APRs or loan terms affect your monthly payment.
How interest is calculated
Interest is charged on your outstanding balance each month.
As you make payments, the balance reduces—so the interest portion shrinks too. This is why early payments feel like they barely touch the principal.
Here’s how the first three months look for our £10,000 example:
| Month | Balance | Interest | Principal | New Balance |
|---|---|---|---|---|
| 1 | £10,000 | £57.50 | £250.97 | £9,749 |
| 2 | £9,749 | £56.06 | £252.41 | £9,497 |
| 3 | £9,497 | £54.61 | £253.86 | £9,243 |
Each month, less interest is charged and more goes toward clearing your debt.
Three ways to reduce loan costs
1. Choose a shorter term
Shorter terms mean higher monthly payments but far less interest overall.
Repaying our £10,000 loan over 24 months instead of 36 saves hundreds in interest—though your monthly payment increases to roughly £450.
2. Make overpayments
Even small extra payments reduce total interest significantly.
Paying an extra £50 per month on a £10,000 loan could save you over £200 in interest and clear the debt months earlier. See the impact of overpayments on your own loan.
3. Compare before you borrow
APRs vary widely between lenders.
A loan at 5.9% APR costs far less than one at 9.9% over the same term. Always compare loans side-by-side before committing.
Fixed vs variable rates
Fixed-rate loans keep the same monthly payment throughout the term. This makes budgeting easier and protects you from rate rises. Most UK personal loans are fixed rate.
Variable-rate loans change with the Bank of England base rate. If rates rise, so do your payments. If they fall, payments decrease. Variable rates are more common with mortgages and some credit facilities.
Fixed rates offer certainty. Variable rates can be cheaper initially but carry more risk.
Put it into practice
Loan repayments become clearer once you understand how principal and interest shift over time.
Whether you’re comparing offers, considering overpayments, or simply want to know what you’ll actually pay:
- Calculate loan repayments with full amortisation schedules
- Compare up to 4 loans side-by-side
- See how overpayments reduce your term and interest
For more practical finance guides, explore our guides.
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Put This Into Practice
Use our free calculators to model your own scenarios