How Our Calculators Work

Last updated: January 2025

Our financial calculators use industry-standard formulas for loan amortisation, compound interest, and repayment modelling. These formulas reflect common UK lending practices and established financial mathematics.

Below you'll find detailed explanations of the key calculations used in our tools, along with their assumptions and limitations.

Loan Amortisation Formula

The standard loan amortisation formula calculates your monthly payment based on the loan amount (principal), interest rate, and loan term:

Monthly Payment (PMT) =

P × [r(1 + r)^n] / [(1 + r)^n - 1]

Where:
• P = Principal (loan amount)
• r = Monthly interest rate (annual rate ÷ 12)
• n = Number of monthly payments (term in months)

This formula produces a fixed monthly payment that covers both principal and interest. Early payments are mostly interest, while later payments pay down more principal. This is called amortisation.

How We Generate Amortisation Schedules

For each payment period, we calculate:

  • Interest payment: Outstanding balance × monthly interest rate
  • Principal payment: Total payment - Interest payment
  • Remaining balance: Previous balance - Principal payment

APR vs Interest Rate

Understanding the difference between APR and interest rate is crucial for comparing loans:

Interest Rate

The annual cost of borrowing expressed as a percentage. This is the rate used to calculate interest on your loan balance.

APR (Annual Percentage Rate)

The total cost of borrowing including the interest rate plus fees, charges, and other costs. APR provides a more accurate comparison between different loan products.

Our calculators compute APR by finding the effective interest rate that equates the present value of all payments to the loan amount minus fees. This uses iterative solving to account for upfront costs.

Overpayments and Early Payoff

When you make extra payments on a loan, the additional amount reduces your principal balance directly. This has two key benefits:

  • Reduced interest: Lower balance means less interest charged over time
  • Shorter term: You pay off the loan faster, potentially saving years of payments

How We Calculate Overpayment Savings

Our overpayment calculator:

  1. 1. Calculates the standard amortisation schedule without extra payments
  2. 2. Recalculates with extra payments applied to principal after each regular payment
  3. 3. Compares total interest paid and payoff time between both scenarios
  4. 4. Shows you the break-even point where interest savings exceed any overpayment fees

Balloon Payments

A balloon payment is a large lump sum due at the end of a loan term. Loans with balloon payments typically have:

  • Lower monthly payments during the loan term
  • A significant final payment covering the remaining principal

Our balloon payment calculator adjusts the standard amortisation formula to account for the reduced principal portion in monthly payments, with the balloon amount deferred to the final payment.

Compound Interest

Compound interest is interest calculated on both the principal and accumulated interest from previous periods. The formula is:

Future Value (FV) =

P × (1 + r/n)^(n×t)

Where:
• P = Principal amount
• r = Annual interest rate
• n = Number of times interest compounds per year
• t = Time in years

This formula applies to savings accounts, investments, and other interest-bearing accounts where interest is added to the principal periodically.

Assumptions and Limitations

Our calculators are based on several key assumptions:

  • Fixed interest rates: Most calculators assume the interest rate remains constant throughout the loan term
  • Regular payments: Payments are made on time and in full each period
  • No missed payments: Late fees and penalties are not included
  • Standard amortisation: Calculations follow typical UK lending practices
  • Illustrative results: Actual loan terms may vary based on lender policies and individual circumstances

Important: These Are Estimates

All calculations provided are automated estimates and should be used for guidance only. They should not be considered financial advice or binding offers. Actual loan terms, rates, fees, and conditions will vary based on your individual circumstances, credit profile, lender policies, and current market conditions. Always verify calculations with your lender and consult a qualified financial adviser before making financial decisions.

Precision and Accuracy

We use high-precision arithmetic for all financial calculations to ensure accurate results down to the penny. Our calculation engine uses BigInt-based currency types and basis point precision for percentages, eliminating floating-point rounding errors common in financial calculations.

Questions About Our Calculations?

If you have questions about how a specific calculator works or want to understand the methodology behind a particular calculation, please contact us. We're committed to transparency and happy to explain our approach in more detail.

You can also review our Editorial Policy to learn more about our commitment to accuracy and quality.