How is my monthly repayment worked out?

2 min read

3 inputsAmount, rate, term

Level paymentSame each month

Interest + capitalSplit shifts over time

AmortisedFront-loaded interest

The three inputs

Every standard repayment loan is worked out from three numbers: how much you borrow, the interest rate, and the term. An amortisation formula turns those into a single level monthly payment that clears the loan exactly by the end of the term. Change any input and the payment moves — borrow more, or shorten the term, and it rises; lengthen the term and it falls. Try the combinations on the repayment calculator.

What each payment is made of

On a reducing-balance loan, each level payment splits into two parts: interest on the current balance, and capital repaid. Early on, the balance is high so most of the payment is interest and little is capital. As the balance falls, the interest portion shrinks and more of each payment goes to capital. The payment stays level, but its composition shifts across the term — this is amortisation.

Why the split matters

Understanding the split explains two things directors often ask about. First, why the balance falls slowly at the start — because early payments are mostly interest. Second, why overpaying early saves so much: an early overpayment cuts the balance before years of interest can accrue on it. On a flat-rate loan the split works differently — the interest is fixed at outset — so overpaying may not help.

See how the balance falls over time in the repayment schedule, then apply for a facility sized to a payment you can sustain.

Frequently asked questions

Why is so little of my early payment reducing the balance?

Because interest is charged on the outstanding balance, which is at its highest early in the term. Each level payment has to cover that larger interest charge first, leaving less to reduce the capital. As the balance falls, the interest portion shrinks and more of each payment attacks the principal. It is normal and it is why the balance drops slowly at first.

Will my payment ever change during the term?

On a fixed-rate loan the payment stays level for the whole term unless you change the loan — by overpaying, extending, or restructuring. On a variable-rate loan the payment can move when the base rate changes. If your payment changes unexpectedly and you are on a fixed deal, query it with the lender.