How is the monthly payment calculated?
Most personal loans and mortgages use a "fixed payment" system, where the amount you pay each month stays constant throughout the loan term, but the portion of interest within each payment is higher at the start and gradually decreases in favor of paying down the principal as you approach the end of the term. The calculation relies on three main factors: the loan amount, the annual interest rate, and the repayment term.
Flat rate vs. reducing rate
A reducing rate is charged each month on the remaining balance only, so interest falls as you repay. A flat rate is charged on the full original amount for the whole term, even after much of it is repaid. The same headline number therefore costs much more as a flat rate: a 100,000 loan over 5 years at 5% costs about 1,887 a month on a reducing basis, but about 2,083 on a flat basis. Many personal-finance offers are quoted as flat rates, so check the method before comparing; the calculator also shows the reducing-rate equivalent of a flat rate.
Conventional financing vs. Islamic financing
Conventional (bank) financing relies on interest as a percentage added to the borrowed amount. Islamic financing structures (such as Murabaha and Ijara Muntahia Bittamleek) instead rely on selling or leasing the item with a pre-agreed profit margin rather than interest. While the resulting monthly payment may sometimes look numerically similar, the contractual structure and underlying religious basis are entirely different. This calculator provides a general numerical estimate that approximates the payment concept in both cases.
Factors that affect total financing cost
- Interest or profit rate: the higher it is, the more you'll pay in total above the original loan amount.
- Repayment term: extending the term lowers the monthly payment but increases total interest paid over the long run.
- Administrative fees and insurance: some lenders add fees not reflected in the stated interest rate, so always ask about the true total cost (APR).
- Early repayment: some contracts allow reduced interest for early payoff, while others impose a penalty — check your contract terms.
Frequently Asked Questions
Will this result exactly match what my bank tells me?
Usually very close, but it may differ slightly due to administrative fees or extra insurance the bank charges that aren't included in this calculator. Always request the official amortization schedule from your lender before signing.
Why does total interest increase with a longer loan term even though the payment is lower?
Because interest is calculated monthly on the remaining balance; the longer the amount stays unpaid, the more you pay in cumulative interest overall, even if the monthly payment itself is smaller.
Does the calculation differ between fixed and declining-balance interest?
Yes, significantly. A flat rate is charged on the full original amount for the whole term, while a reducing rate applies only to the remaining balance, so the same stated rate means a higher payment and total cost when it is flat. Many personal-finance offers are quoted as flat rates, so choose your offer's method in field 4 and the calculator will show its reducing-rate equivalent.