How loan repayments work
How the level monthly payment is worked out, what APR really means, and how the term changes the total cost.
A personal loan is repaid in level monthly payments. Each one covers the interest on what you still owe plus a slice of the amount you borrowed, so the debt clears exactly at the end of the term. Three things decide the size of that payment: how much you borrow, the annual percentage rate (APR), and how many years you take to pay it back.
The short version
- You pay a fixed amount each month that covers interest plus part of the loan, until the balance reaches zero.
- The advertised rate is usually a representative APR. Only 51% of people accepted have to be offered it, so your rate can be higher.
- A longer term lowers the monthly payment but adds to the total interest you pay.
- You can normally settle early and get an interest rebate. Every figure here is an estimate to plan with, not a loan offer.
Take a £10,000 loan at a representative 7.9% APR. The numbers below show how the same debt looks over three years versus five. The longer term cuts the monthly payment by over £100, but you pay around £870 more in interest by the end.
| 3-year term | 5-year term | |
|---|---|---|
| Monthly payment | £312.90 | £202.29 |
| Total interest | £1,264 | £2,137 |
| Total repaid | £11,264 | £12,137 |
Those are estimates, rounded, and assume the rate stays fixed for the whole term, which is normal for a personal loan. To try your own amount, rate and term, open the loan repayment calculator.
How the payment is worked out
The lender charges interest on the balance you still owe, then sets one level monthly payment that clears both the interest and the loan by the last month of the term. This is called amortisation, which simply means chipping a debt down to zero with equal payments. It is the same engine that runs a repayment mortgage: a personal loan is essentially a mortgage with no deposit.
Early on, more of each payment goes on interest, because you still owe most of the money. As the balance falls, the interest part shrinks and more of the payment eats into the loan itself, even though the total monthly figure stays the same. For the full mechanics, including a month-by-month split, see our guide to how mortgage repayments work; the method is identical.
APR vs representative APR
The annual percentage rate (APR) is the yearly cost of a loan with interest and any compulsory fees rolled into one percentage. Because every lender has to calculate it the same way, it is the fairest figure for comparing two loans.
The catch is the word in front of it. Lenders advertise a representative APR, and under the rules only 51% of people accepted for the loan have to be offered that rate or better. The other 49% can be charged more. Your own rate depends on your circumstances, such as your credit history and income, so the headline figure is a guide, not a promise. You only learn your real rate once you apply or get a personalised quote.
How the term changes the cost
The term is the number of years you take to repay. Stretching it out is the main lever people reach for when a monthly payment feels too high, and it works: more months to spread the debt across means a smaller payment each time.
The cost is interest. A longer term keeps you in debt for longer, so the lender charges interest over more months and the total you repay grows. In the £10,000 example above, moving from three years to five cut the monthly payment by about a third but added roughly £870 of interest. The sweet spot is the shortest term whose monthly payment you can comfortably afford.
Secured vs unsecured
Personal loans come in two forms. An unsecured loan is not tied to anything you own; the lender lends on your promise to repay, backed by your credit record. Most personal loans are unsecured.
A secured loan is tied to an asset, usually your home or car, which the lender can repossess and sell if you stop paying. Secured loans can come with a lower rate or let you borrow more, because the lender takes on less risk. The risk shifts to you: missing payments can mean losing the asset, so weigh that carefully before putting your home up against a loan.
| Unsecured | Secured | |
|---|---|---|
| Tied to an asset | No | Yes, your home or car |
| If you stop paying | Hurts your credit, lender may chase the debt | The asset can be repossessed |
| Typical use | Most personal loans | Larger sums or weaker credit |
Repaying early
With most regulated personal loans you can clear the balance early, in part or in full. Under the Consumer Credit Act, the lender works out a settlement figure that rebates the interest you would otherwise have paid on the months you are no longer borrowing for, so you are not charged for time you do not use.
The lender is allowed to add an early settlement charge, usually up to about one to two months' interest, to cover the cost of the early payoff. Always ask for a written settlement figure before you pay, and check whether the rebate outweighs the charge. If clearing the loan would empty your savings, it is worth keeping an emergency buffer rather than going all in.
Deciding which debt to attack first is a separate question. If you are juggling several balances, our guides to paying off debt and clearing credit card debt walk through the order that usually saves the most.
Common questions
- What is the difference between APR and the interest rate on a loan?
- The interest rate is the lender's charge for lending you the money. The annual percentage rate (APR) is broader: it rolls the interest together with any compulsory fees, such as an arrangement fee, into a single yearly percentage. Because APR has to be worked out the same way by every lender, it lets you compare two loans on a like-for-like basis rather than being caught out by hidden charges.
- Why was I offered a higher rate than the advertised loan APR?
- Because the advertised figure is a representative APR, and only 51% of people accepted for the loan have to be given that rate or better. The other 49% can be offered more. Your actual rate is set after the lender looks at your credit history, income and outgoings, so a thinner credit file or a higher debt level can push it up. You only know your real rate once you apply or get a quote.
- Does borrowing over a longer term cost more?
- Usually, yes. A longer term spreads the same debt across more monthly payments, so each one is smaller and easier on your budget. The trade-off is that you are paying interest for longer, so the total you hand over by the end is larger. A shorter term does the opposite: bigger monthly payments, but less interest overall.
- What happens if I miss a loan payment?
- A missed payment is usually reported to the credit reference agencies, which can lower your credit score and make future borrowing harder or dearer. The lender may also add a fee. If money is tight, it is worth contacting the lender before the payment is due, as many will agree a plan. Free, impartial help is available from MoneyHelper and Citizens Advice.
- Can I pay a personal loan off early?
- For most regulated personal loans, yes. Under the Consumer Credit Act you can settle early and the lender rebates the interest you would have paid on the time you are no longer borrowing for. The lender can add an early settlement charge of up to about one to two months' interest, so ask for a settlement figure first and check it against what you still owe.
- Are these loan figures a quote?
- No. They are estimates to help you plan, not financial advice and not a loan offer. Your actual rate, monthly payment and any fees are set by a lender after assessing your application.
About this article
Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. We checked this article against MoneyHelper, the Financial Conduct Authority and Citizens Advice, and the early-settlement rules against the Consumer Credit Act. The figures here are estimates to help you plan, not financial advice and not a loan offer. Your actual rate, payment and any fees depend on a lender assessing your circumstances. Last updated June 2026.