How Loan Payments Work: Principal, Interest and the Cost of Time
A fixed-rate loan has a payment that stays the same every month, yet the split between interest and repayment of the borrowed money changes with every instalment. Knowing that split helps you compare offers, judge a term and decide whether an extra payment is worth it.
Where the monthly payment comes from
The standard amortising formula is payment = L × r ÷ (1 − (1 + r)−n), where L is the amount borrowed, r the monthly rate (annual rate ÷ 12) and n the number of monthly payments. Take 200,000 at 6% over 30 years:
- Monthly rate: 0.06 ÷ 12 = 0.005.
- Number of payments: 30 × 12 = 360.
- Growth factor: 1.005360 = 6.0226.
- Discount factor: 1 − 1 ÷ 6.0226 = 0.8340.
- Payment: 200,000 × 0.005 ÷ 0.8340 = 1,000 ÷ 0.8340 = 1,199.10.
The Loan Payment Calculator performs the same steps and adds a year-by-year table, so you never have to evaluate the power by hand.
Why early payments are mostly interest
Interest is charged on whatever balance is still owed, and at the start that balance is at its highest. The first instalment of the loan above splits like this:
- Interest for month one: 200,000 × 0.005 = 1,000.00.
- Principal repaid: 1,199.10 − 1,000.00 = 199.10.
- Balance after the payment: 199,800.90.
- Interest for month two: 199,800.90 × 0.005 = 999.00, so principal rises to 200.10.
Only 199.10 of the first 1,199.10 reduces the debt. By the final year the proportions reverse, because the remaining balance is small.
The effect of the term
The rate and the amount are fixed here; only the length changes. A longer term lowers the monthly payment and raises the total interest, and the trade is not linear.
| Term | Monthly | Total interest |
|---|---|---|
| 15 years | 1,687.71 | 103,788 |
| 20 years | 1,432.86 | 143,887 |
| 25 years | 1,288.60 | 186,581 |
| 30 years | 1,199.10 | 231,676 |
Doubling the term from 15 to 30 years cuts the monthly payment by 488.61 but more than doubles the interest, from 103,788 to 231,676. The monthly saving is real; so is the extra 127,888.
What an extra payment does
Paying 200 more each month changes the schedule more than most people expect. The payment becomes 1,399.10, and the number of payments needed to clear 200,000 at 6% is:
- n = ln(1,399.10 ÷ (1,399.10 − 1,000)) ÷ ln(1.005).
- n = ln(3.5056) ÷ 0.0049875 = 251.5, so 252 payments.
- Total paid: 252 × 1,399.10 = 352,573.20.
- Interest: 352,573.20 − 200,000 = 152,573.20.
That is about 79,100 less interest and roughly nine years earlier, from an extra 200 a month. Always ask the lender how overpayments are applied before relying on the figure.
Checking affordability
A payment you can sustain matters more than the largest loan a formula allows. Set a comfortable monthly figure, a realistic rate and a term you can live with, then read the loan size those inputs support with the Loan Affordability Calculator. The answer is arithmetic, not an approval: lenders apply income, debt-ratio and credit rules of their own.
Saving instead of borrowing
If the purchase can wait, compare the loan with a savings plan. The Savings Goal Calculator shows how much you would need to set aside each month to reach the same amount by a chosen date, and the Compound Interest Calculator shows what the set-aside could earn. For a short horizon the difference is small; over many years it can be substantial.
What the estimate leaves out
Arrangement fees, insurance, taxes, variable rates and early-repayment charges are not included. Each changes the true cost, sometimes by more than the rate difference between two offers. Ask the lender for the official schedule before signing, and check the ideas in the compound interest guide if you want to see how the balance behaves between payments.
Mistakes that hide the real cost
- Comparing payments only. A longer term can make any loan look affordable while increasing the total interest.
- Using the annual rate as the monthly rate. Divide by 12; a rate of 6% is 0.5% a month, not 6%.
- Forgetting fees inside the price. A zero-interest offer often carries an upfront charge that belongs in the comparison.
- Assuming overpayments shorten the term automatically. Some lenders reduce the payment instead.
- Testing one rate. Run the numbers one or two points higher to see whether the payment still fits.
Frequently asked questions
How much is the payment on 200,000 at 6% over 30 years?
1,199.10 a month. The monthly rate is 0.005 over 360 payments, and 200,000 × 0.005 ÷ 0.8340 gives 1,199.10.
Why is so little capital repaid at the start?
Interest is charged on the balance, which is largest at the beginning. The first payment contains 1,000.00 of interest and only 199.10 of principal.
How much does the term change the total?
On 200,000 at 6%, a 15-year term costs 103,788 of interest and a 30-year term 231,676, a difference of 127,888.
Does an extra 200 a month really help?
Yes. It raises the payment to 1,399.10, clears the loan in 252 payments instead of 360 and cuts interest by about 79,100.
- Loan Payment Calculator – Estimate monthly repayments on a fixed-rate loan.
- Loan Affordability Calculator – Find the loan size a monthly payment can support.
- Savings Goal Calculator – Estimate monthly savings needed to reach a target.
- Compound Interest Calculator – Estimate investment growth with compound interest.
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- Understanding Compound Interest: Why Time Matters More Than Amount
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This guide is for general information and is not financial, tax, legal or medical advice. See our disclaimer.