How loan repayments are worked out, a worked UK example, what APR and 'representative' really mean, and the checks to make before you borrow.
A loan calculator turns three numbers (how much you borrow, the interest rate and the term) into a monthly payment and a total cost. It is a quick way to compare offers, but only if you put the right figures in and understand what comes out. This guide shows how the maths works, walks through an example, and covers the traps calculators do not show.
How the monthly payment is worked out?
Most UK personal loans are repaid in equal monthly instalments. Each payment covers that month's interest, and the rest reduces the balance. Early payments are mostly interest; later ones are mostly capital. The standard formula is:
Monthly payment = P × r ÷ (1 − (1 + r)−n)
where P is the amount borrowed, r is the monthly interest rate and n is the number of monthly payments. Because APR is an annual rate that includes compounding, the monthly rate is found as (1 + APR)1/12 − 1, not simply APR ÷ 12.
A worked example
Borrowing £10,000 over five years (60 payments) at 7% APR:
- Monthly rate: 1.071/12 − 1 ≈ 0.565%
- Monthly payment: about £197
- Total repaid: about £11,820, so the loan costs about £1,820 in interest
Two changes show why comparing matters:
- Same loan at 12% APR: about £219 a month and roughly £3,160 in interest, over £1,300 more.
- Same 7% loan over three years: about £308 a month, but only around £1,080 in interest. A shorter term costs more each month and less overall.
These are illustrative figures. Your lender's quote is what counts, and it should show the monthly payment and total amount payable.
What "representative APR" means?
APR (annual percentage rate) combines interest and compulsory fees into one yearly figure, which makes loans comparable. In adverts you will usually see a representative APR. Under the Financial Conduct Authority's rules, at least 51% of people taking out that deal in response to the promotion must get that rate or better. That means up to 49% may be offered a higher rate, depending on their circumstances and credit history. Do not assume the advertised rate is the one you will get.
Check your likely rate without harming your credit file
Many lenders and comparison sites offer an eligibility check that uses a soft search. Soft searches are not visible to other lenders and do not affect your credit score. A full application uses a hard search, which other lenders can see. Several hard searches in a short time can make lenders more cautious, so check eligibility first and apply for the deal you are most likely to get.
What a calculator does not tell you?
- Early repayment charges. You have a legal right to repay a regulated loan early, but for most agreements made since February 2011 the lender can charge compensation of up to 1% of the amount repaid early if more than a year of the term is left, or 0.5% if less, and never more than the interest you would have paid. Lenders can usually only claim this when you repay more than £8,000 early in any 12-month period.
- Fees not in the APR. Optional extras such as payment protection are not included. Read the pre-contract information.
- The cost of missing payments. Late fees and damage to your credit file can outweigh any saving from a cheaper rate.
- Whether you need to borrow at all. Savings, a 0% purchase card repaid in full within the offer period, or waiting can all be cheaper.
A step-by-step way to compare loans
- Decide the smallest amount you need, and the monthly payment you can comfortably afford after essential bills.
- Run eligibility checks (soft searches) with a few lenders.
- For each offer, note the APR you are actually offered, the monthly payment and the total amount payable.
- Compare the total amount payable as well as the monthly cost, and check the shortest term you can afford.
- Read the early repayment terms if you may want to clear it early.
- Remember the 14-day right to withdraw from a credit agreement after signing, if you change your mind.
Frequently asked questions
Is a lower monthly payment always better?
No. Stretching the term lowers the monthly cost but raises the total interest, as the example shows.
Where can I get free help if borrowing is getting difficult?
MoneyHelper, StepChange and Citizens Advice all offer free, impartial help with debt.
Sources and further reading
- FCA: Consumer Credit sourcebook (CONC 3.5, financial promotions and APR)
- legislation.gov.uk: Consumer Credit Act 1974, section 66A (right of withdrawal)
- legislation.gov.uk: Consumer Credit Act 1974, section 95A (early settlement compensation)
- MoneyHelper (government-backed money guidance)
Facts checked on 20 October 2026. Spotted an error? Tell us and we will correct it.