Loan Calculator: How It Works
A personal or business loan is priced by three numbers — amount, rate and term — but sold using a fourth: the monthly payment. This calculator lets you work in either direction, and this page explains the traps that make two loans with identical headline rates cost very different amounts.
Flat rate versus reducing balance: the single biggest trap
Two lenders quote you a rate. One says 7%, the other says 12%. The 7% loan can easily be the more expensive one.
A reducing-balance rate charges interest only on what you still owe. As you repay, the interest shrinks. This is how mortgages, credit cards and any regulated APR disclosure work.
A flat rate charges interest on the original amount for the entire term, regardless of how much you have paid off. On a 3-year loan, a flat rate is roughly equivalent to a reducing rate around 1.8–1.9 times higher.
| Quoted | Method | Interest on 100,000 over 3 yrs | True reducing-rate equivalent |
|---|---|---|---|
| 7% | Flat | 21,000 | ≈ 13.1% |
| 12% | Reducing | 19,570 | 12% |
Whenever a lender quotes flat, ask for the APR. Regulated lenders must disclose it, and APR is the only number that lets you compare offers honestly.
The formula
For a reducing-balance loan with fixed instalments:
Payment = P × r ÷ [1 − (1 + r)−n]
where P is the amount borrowed, r is the rate per period and n is the number of periods. If your payments are monthly, r is the annual rate ÷ 12 and n is years × 12. This is the same relationship spreadsheets expose as PMT().
Fees change the real cost more than you expect
A processing or origination fee is usually deducted from the amount disbursed, but interest is charged on the full sanctioned amount. Borrow 100,000 with a 2% fee and you receive 98,000 while paying interest on 100,000 — the effective rate rises even though the quoted rate did not move.
| Charge | Typical range | Negotiable? |
|---|---|---|
| Processing / origination fee | 0.5%–3% of loan | Often, especially with a good credit profile |
| Prepayment / foreclosure charge | 0%–5% of outstanding | Sometimes waived on floating-rate loans |
| Late payment penalty | 1%–3% per month on the overdue amount | Rarely |
| Insurance bundled with the loan | Varies | Usually optional — ask |
A worked comparison
You need 500,000 over 5 years. Two offers:
- Lender A: 11% reducing, 1% fee. Payment 10,871/month, total repaid 652,260, plus 5,000 fee = 657,260.
- Lender B: 10.5% reducing, 3% fee. Payment 10,747/month, total repaid 644,820, plus 15,000 fee = 659,820.
Lender B has the lower rate and the lower monthly payment, and is still the more expensive loan. Comparing on payment alone would have picked wrong.
Secured versus unsecured
A secured loan is backed by an asset the lender can take if you default, so rates are lower — often several percentage points. An unsecured loan costs more because the lender's only recourse is your credit record and the courts. The rate gap is the price of not risking the asset, and it is a genuine trade, not a trick. Borrow secured only against something you could survive losing.
What actually moves the rate you are offered
Credit history and score carry the most weight, followed by your debt-to-income ratio, employment stability, the loan's purpose, and the term. Applying to several lenders in a short window is usually treated as rate shopping rather than repeated applications, but spreading applications over months is read as distress and can push your rate up.