Knowing how to calculate loan payments yourself gives you confidence when comparing offers. Whether you’re shopping for a personal loan, car finance, or mortgage, understanding the maths helps you spot a good deal.
This guide shows you the formula lenders use, with step-by-step examples you can verify yourself.
The loan payment formula
UK lenders use the amortisation formula to calculate fixed monthly payments:
PMT = P × [r(1 + r)^n] / [(1 + r)^n - 1]
Where:
- PMT = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (months)
This formula ensures your monthly payment stays the same throughout the loan term, with the split between interest and principal changing each month.
Step-by-step calculation example
Let’s calculate the monthly payment for a £15,000 personal loan at 7.5% APR over 48 months.
Step 1: Identify your variables
- Principal (P) = £15,000
- Annual interest rate = 7.5%
- Monthly interest rate ® = 7.5% ÷ 12 = 0.625% = 0.00625
- Number of payments (n) = 48 months
Step 2: Calculate (1 + r)^n
(1 + 0.00625)^48 = 1.3478
Step 3: Apply the formula
PMT = 15,000 × [0.00625 × 1.3478] / [1.3478 - 1]
PMT = 15,000 × 0.008424 / 0.3478
PMT = 15,000 × 0.02422
PMT = £363.30
Your monthly payment would be £363.30. Over 48 months, you’ll repay £17,438—meaning £2,438 in interest.
Verify this calculation and see how different rates or terms affect your payment.
Real UK loan examples
Here’s how the formula works across different loan amounts and terms:
| Loan Amount | APR | Term | Monthly Payment | Total Interest |
|---|---|---|---|---|
| £5,000 | 6.9% | 24 months | £223.78 | £370.72 |
| £10,000 | 7.5% | 36 months | £311.89 | £2,228.04 |
| £20,000 | 8.9% | 60 months | £414.17 | £4,850.20 |
| £25,000 | 5.9% | 48 months | £588.95 | £3,269.60 |
Notice how higher APRs and longer terms significantly increase total interest. Always compare multiple loans before choosing.
What affects your monthly payment?
Loan amount (Principal)
The more you borrow, the higher your monthly payment. Simple enough—but even small increases compound over time.
Borrowing £12,000 instead of £10,000 at 7% over 36 months adds about £63 to your monthly payment and £227 in extra interest.
Interest rate (APR)
This has the biggest impact on cost.
Take a £15,000 loan over 48 months:
- At 5.9% APR = £349.89/month (£1,794.72 interest)
- At 9.9% APR = £380.23/month (£3,051.04 interest)
That’s £1,256 extra just from a 4% rate difference. Always shop around.
Loan term (Duration)
Longer terms reduce monthly payments but increase total interest dramatically.
£10,000 at 7.5% APR:
- 24 months = £447.54/month (£741.00 interest)
- 36 months = £311.89/month (£2,228.04 interest)
- 60 months = £200.38/month (£2,022.80 interest)
The 60-month term costs nearly triple the interest of the 24-month option, even though monthly payments are lower.
How amortisation works
Lenders structure loans so early payments contain more interest, while later payments contain more principal.
Here’s a £10,000 loan at 7% APR over 36 months (£308.77/month):
| Payment | Principal | Interest | Balance |
|---|---|---|---|
| 1 | £250.10 | £58.67 | £9,749.90 |
| 12 | £263.82 | £44.95 | £8,238.48 |
| 24 | £278.88 | £29.89 | £5,598.32 |
| 36 | £307.00 | £1.77 | £0.00 |
By payment 24, the split has reversed—now most of your payment reduces the principal. This is why making overpayments early saves the most money.
When manual calculations matter
Shopping for loans
Use the formula to verify lenders’ quotes and spot hidden fees. If a lender’s payment doesn’t match your calculation, they may be including charges not shown in the APR.
Comparing offers
Compare loans side-by-side to see which combination of rate and term gives the best value for your budget.
Planning your budget
Calculate exactly what you can afford before applying. Borrowing within your means prevents financial stress later.
Common calculation mistakes
Forgetting to convert annual rate to monthly
The formula needs the monthly interest rate. Always divide the annual percentage by 12 before calculating.
Confusing APR with interest rate
APR includes fees, so it’s the true cost of borrowing. Use APR for accurate comparisons, but check if the lender quotes nominal interest rate instead.
Ignoring extra fees
Some lenders charge arrangement fees, early repayment charges, or late payment penalties. Factor these into your decision even if they’re not in the monthly payment.
Put it into practice
Understanding the loan payment formula empowers you to make confident borrowing decisions.
Whether you’re verifying lender quotes, comparing offers, or planning your budget:
- Calculate loan payments with full amortisation schedules
- Compare up to 4 loans to find the best deal
- See how overpayments reduce your total cost
For more practical finance guides, explore our guides.
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Put This Into Practice
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