An amortized loan is repaid in equal instalments, each covering the interest accrued since the last payment with the remainder reducing the balance. Because the balance shrinks, the interest portion falls every period and the principal portion rises.
How the payment is derived
The formula solves for the constant payment whose present value, discounted at the periodic rate, exactly equals the amount borrowed.
Payment = P · i / (1 − (1 + i)^−n) P = amount borrowed i = rate per period n = total number of payments
What drives total interest
- Rate — the strongest single lever. Two points of rate on a five-year $25,000 loan changes total interest by roughly $1,400.
- Term — longer terms lower the payment but raise total cost, often sharply.
- Payment frequency — bi-weekly schedules produce 26 half-payments a year, one extra full payment annually, quietly shortening the loan.
- Extra payments — anything above the scheduled amount goes straight to principal and compounds in your favour.
Secured versus unsecured
| Secured | Unsecured | |
|---|---|---|
| Collateral | Yes — property or vehicle | None |
| Typical rate | Lower | Higher |
| Typical limit | Higher | Lower |
| Risk to you | Asset can be repossessed | Credit damage, collection |
Reading an amortization schedule
The schedule lists every payment with its split between interest and principal and the balance remaining. It answers questions a single payment figure cannot: what you will still owe in year three, how much interest you will have paid by then, and how much a lump sum would save.
Check it before refinancing. Deep into a loan most of the interest is already behind you, and restarting the clock on a fresh 30-year term can raise lifetime cost even at a lower rate.
Worked example
Using the values pre-loaded in the calculator above:
| Input | Value |
|---|---|
| Loan amount ($) | 25000 |
| Interest rate (%) | 7.5 |
| Term (yrs) | 5 |
| Payment frequency | Monthly |
| Output | Value |
|---|---|
| Payment | $500.95 |
| Number of payments | 60 |
| Total interest | $5,056.92 |
| Total repaid | $30,056.92 |
Frequently asked questions
What credit score do I need?
Rough guidance: 720+ reaches the best pricing, 660–719 is solid, 620–659 is workable at higher rates, and below 620 limits options considerably. Requirements vary by lender and loan type.
Does applying hurt my credit?
A hard inquiry typically costs a few points. Rate shopping for the same loan type within a 14–45 day window is usually treated as a single inquiry by scoring models.
Should I take the longest term available?
Only if you need the lower payment. Longer terms cost substantially more overall — and on vehicles they raise the risk of owing more than the asset is worth.
What is an origination fee?
An upfront charge, commonly 1–8% of the amount borrowed, often deducted from the funds you receive. It raises your effective APR above the quoted rate, so compare on APR.