The formula
How to calculate loan interest
Interest on an amortising loan is charged on the balance outstanding, which falls every month. That is why the total is nowhere near the amount borrowed times the rate times the years.
The first-month figure shows the starting point. On £20,000 at 6.5% it is about £108, and every subsequent month is slightly lower as the balance drops — by the final payment it is a couple of pounds.
Fill in the following:
- Amount borrowed
- Interest rate (%)
- Term (years)
Results appear immediately — there is nothing to submit. Changing a field rewrites the link, so you can share the exact scenario you are looking at.
Some of the fields above will accept figures that seem unusual for your own situation, and that is deliberate: the formula behind loan interest works the same way regardless of scale, so the calculator does not stop you testing a hypothetical scenario a long way from your actual numbers — often the fastest way to see which input the result is most sensitive to.
Why loan interest matters
The formula behind loan interest is standard and has not changed in decades; what changes is the situation it gets applied to. Two households can run the identical calculation and land on very different conclusions once their own numbers — income, rate, term, balance — are dropped in, which is why a generic textbook example is less useful than a calculator you can adjust to match your own circumstances.
This tends to come up when comparing two concrete alternatives — two lenders, two savings products, two ways of structuring the same decision — rather than in the abstract. Run both scenarios through the same calculator with the same assumptions and the comparison becomes fair, because the only thing changing between the two results is the number you are actually trying to test.
This kind of calculation rarely stands entirely alone. A loan interest figure usually feeds into a wider decision — how it compares with a competing offer, whether it fits inside a monthly budget, what it does to a longer-term plan — and the value of having it as an exact number rather than a rough guess is that those follow-on comparisons stop being guesswork too. Once one figure in a decision is precise, it is worth making the effort to get the others precise as well, rather than mixing an exact calculation with several estimates and treating the result as equally reliable.
A calculator like this one is often bookmarked and returned to repeatedly over months rather than used once, particularly for anything tied to an ongoing plan such as a mortgage, a savings goal or an investment being tracked. Because the figures live in the web address rather than only in memory, coming back to the same page with updated numbers is quicker than starting from a blank spreadsheet each time.
Worked example
A concrete run-through, using the values already in the fields:
- Amount borrowed: 20,000
- Interest rate: 6.5 %
- Term: 7 years
That gives:
- Total interest: 4,947.05
- Interest in month one: 108.33
- Interest as a share of total repaid: 19.83 %
These figures are only the calculator's own starting values, included so the working is visible rather than hidden inside the tool above. Replace them with your own numbers and the same arithmetic applies — nothing about the method changes, only the inputs feeding it.
Reading the result
The share figure is a quick sense check on whether a loan is expensive. Under 15% of the total repaid is unremarkable; above 30% means either a high rate, a long term, or both.
Where this goes wrong. Confusing this with a flat-rate loan. Some car and retail finance charges interest on the original amount for the whole term, which roughly doubles the effective rate — the APR is where that shows up.
A useful check on any unfamiliar result is to compare it against a rough mental estimate first — round the inputs to convenient numbers and see whether the calculator's answer lands in roughly the same territory. A wildly different figure usually means one of the fields was entered in the wrong unit, most often a percentage typed as a whole number where a decimal was expected, or the reverse.
Because you are not borrowing the full amount for the full term. The balance falls with each payment, and interest is charged only on what is still outstanding.
On daily-interest loans, marginally — a few pounds over a term. On loans that calculate monthly it makes no difference at all. Paying more matters far more than paying sooner.
The answer it gives you is total interest. With 20,000 amount borrowed, 6.5 % interest rate and 7 years term, that comes to 4,947.05. Change any field and the figure moves with it.
Whenever one of the underlying figures changes — a new interest rate, a different balance, an updated term — since the result only reflects what is currently in the fields. There is no need to keep a separate record of past results; the web address for a filled-in version already carries the figures used to produce it.
Not unless a tax rate or a fee is explicitly one of the inputs above. Where it is not, the figure shown is a gross calculation, and any tax due depends on your personal circumstances and current tax rules, which are worth checking separately.
The arithmetic itself is exact — the calculator applies the formula shown above precisely, with no rounding until the final figure is displayed. The uncertainty, where it exists, is entirely in the inputs: an estimated rate or an approximate balance carries that same approximation through to the result.