A loan with a fixed rate is repaid in equal monthly payments. Each payment covers the interest for the month and pays down some of the balance.
You get the monthly payment and the total interest, and you can test what paying a little extra each month would save.
How to use the Loan Payment Calculator#
- Enter the loan. Type the amount, the yearly rate and the term.
- Choose years or months. Use the switch beside the term.
- Try an extra payment. Add an amount to see how much interest it saves.
The payment formula#
P is the loan amount, r is the monthly interest rate (the yearly rate divided by 12) and n is the number of monthly payments. A loan of 20,000 at 8 percent over 60 months has r = 0.00667, so the payment is 405.53. You repay 24,331.67 in total, which is 4,331.67 of interest.
Why extra payments help#
Interest is charged on what you still owe, so every extra amount you pay early cuts the balance that interest is charged on. On the loan above, an extra 100 a month clears it in about 47 months instead of 60 and saves roughly 1,040 in interest. Check that your lender allows extra payments without a fee.
Before you borrow#
The calculator uses a simple fixed-rate loan, and doesn’t include fees, insurance or a rate that changes over time. Compare loans on the total cost, not only the monthly payment, because a longer term lowers the payment but raises the interest. See also the compound interest calculator.
A worked example#
A borrower takes ₦5,000,000 at 24 percent a year over 3 years. The monthly rate is 24/12 = 2 percent and there are 36 payments, so the payment is ₦196,164 a month. Over the whole loan they repay ₦7,061,913, of which ₦2,061,913 is interest, 41.2 percent of the amount borrowed. In the first month, ₦100,000 of the payment is interest, and only ₦96,164 reduces the debt.
What an extra payment does#
Adding ₦50,000 a month to the same loan clears it in 27 months, not 36, saving 9 months and ₦581,555 in interest. The reason is that every extra naira goes straight to the balance, so the next month’s interest is smaller. This works best early in the loan, when the balance and interest are highest. Check that the lender does not charge an early repayment fee, and that extra payments are applied to the principal.
Reading a loan offer#
Compare offers by total cost, not just the monthly payment. A longer term gives a smaller payment but more interest. Ask whether the rate is fixed or variable, whether it is quoted per month or per year, and what fees apply for processing, insurance or management. In Nigeria, a rate quoted as 3 percent a month is 36 percent a year before compounding, which is a very different picture from “3 percent”. If you are comparing a savings rate, use the APY calculator.
A shorter term versus a lower payment#
On the example loan of ₦5,000,000 at 24 percent, a 2-year term gives a payment of ₦264,355 and total interest of ₦1,344,532. The 3-year term lowers the payment to ₦196,164, but the interest rises to ₦2,061,913. A lender may push the longer term because of the lower payment, but it costs more. Pick the shortest term your budget can carry safely.
Frequently asked questions#
Using the amortisation formula: payment = P × r ÷ (1 − (1 + r)^−n).
You clear the balance sooner and pay less interest in total.
APR includes certain fees as well as interest, so it’s usually a little higher. Use whichever the lender quotes as the cost of the loan.
Usually yes, if the interest rate is higher than what you could earn elsewhere and there is no early repayment penalty. Paying early cuts the total interest. Keep an emergency fund first, so you do not need to borrow again at a worse rate if something goes wrong.
No. It works out the interest and principal on the loan amount you enter. Processing fees, insurance and other charges are extra, so add them to the amount borrowed if they are financed, or add them to the cost separately, to see the true price of the loan.