How to Calculate Personal Loan Repayments
Loan repayments are calculated using the standard amortization formula, which ensures you pay off both the principal (the amount borrowed) and the interest over the life of the loan. The formula is:
Repayment = P × [r(1 + r)ⁿ] / [(1 + r)ⁿ - 1]
Where:
- P = Principal (loan amount)
- r = Interest rate per payment period (annual rate ÷ number of payments per year)
- n = Total number of payments over the loan term
For example, a $500,000 loan at 6.5% p.a. over 30 years with monthly repayments would have a rate per period of 0.065 ÷ 12 = 0.00542, and 360 total payments (30 × 12).
Weekly vs. Monthly Repayments Explained
Choosing a higher frequency of repayments—weekly or fortnightly instead of monthly—can save you thousands in interest over the life of your loan. Here's why:
The Mathematics
- Monthly: 12 payments per year
- Fortnightly: 26 payments per year (equivalent to 13 monthly payments)
- Weekly: 52 payments per year (equivalent to 13 monthly payments)
By paying fortnightly or weekly, you effectively make one extra monthly payment per year. This extra payment goes directly toward reducing your principal, which means you pay less interest over time and can pay off your loan years earlier.
Real Example
On a $500,000 mortgage at 6.5% over 30 years:
- Monthly payments: Total interest ≈ $637,000
- Fortnightly payments: Total interest ≈ $595,000 (save ~$42,000)
- Weekly payments: Total interest ≈ $593,000 (save ~$44,000)
Tip: If your lender allows, switch to fortnightly repayments for an easy way to pay off your loan faster without significantly impacting your budget.
How to Reduce Your Total Interest
Interest can add up to hundreds of thousands of dollars over a long-term loan. Here are proven strategies to minimise your interest costs:
1. Make Extra Repayments
Any extra money you pay above your minimum repayment goes directly toward reducing your principal. Even small additional amounts—$50 or $100 per month—can save you thousands and shorten your loan term.
2. Use an Offset Account
An offset account is a transaction account linked to your loan. The balance in your offset reduces the principal used to calculate interest. For example, if you owe $400,000 but have $50,000 in your offset, you only pay interest on $350,000.
3. Refinance to a Lower Rate
Interest rates change over time. If you're paying a higher rate than currently available, refinancing could save you significantly. Remember to factor in any break fees or establishment costs.
4. Shorten Your Loan Term
If you can afford higher repayments, reducing your loan term from 30 years to 25 or 20 years dramatically reduces total interest. Use this calculator to compare scenarios.
Australian Loan Tips
Comparison Rates
In Australia, lenders must display a comparison rate alongside the advertised interest rate. The comparison rate includes most fees and charges, giving you a truer picture of the loan's cost. Always compare using comparison rates rather than just headline rates.
Fixed vs Variable Rates
- Fixed: Your rate stays the same for a set period (1-5 years), providing certainty but less flexibility
- Variable: Your rate can change with market conditions, but you typically have more features like offset accounts and extra repayments
Lender's Mortgage Insurance (LMI)
If you borrow more than 80% of a property's value, you'll likely need to pay LMI. This can add thousands to your loan, so factor it into your calculations when budgeting for a home purchase.
Disclaimer
This calculator provides estimates for educational and planning purposes only. Actual loan repayments may vary based on lender-specific calculation methods, fees and charges not included in this calculation, variable interest rate changes over time, extra repayments or redraw facilities used, and offset account balances. This calculator does not constitute financial advice. Before taking out a loan, compare products from multiple lenders and consider seeking advice from a licensed mortgage broker or financial adviser.