How Loan Repayments Are Calculated
Most standard loans use amortisation — a method where each payment covers the interest accrued since the last payment, with the remainder reducing the principal balance. This means early payments are mostly interest, while later payments are mostly principal.
The formula for a monthly repayment is:
M = P × [r(1+r)²] / [(1+r)² − 1]
Where:
- M = monthly repayment
- P = principal (loan amount)
- r = monthly interest rate (annual rate ÷ 12 ÷ 100)
- n = total number of monthly payments (years × 12)
Example: A $25,000 personal loan at 9% per annum over 4 years. r = 9 ÷ 12 ÷ 100 = 0.0075. n = 48. Monthly repayment = $25,000 × [0.0075 × 1.0075&sup4;&sup8;] / [1.0075&sup4;&sup8; − 1] = approximately $622/month.
Personal Loan vs Car Loan vs Business Loan
| Loan Type | Typical Rate (2025) | Typical Term | Secured? |
|---|---|---|---|
| Personal loan (unsecured) | 8–20% p.a. | 1–7 years | No |
| Personal loan (secured) | 5–12% p.a. | 1–7 years | Yes (asset) |
| Car loan | 6–14% p.a. | 1–7 years | Yes (vehicle) |
| Business loan (unsecured) | 8–25% p.a. | 1–5 years | No |
| Business loan (secured) | 5–15% p.a. | 1–15 years | Yes (property) |
Rates shown are indicative. Your actual rate depends on your credit score, income, loan purpose, and lender. Always compare at least three lenders before committing.
How to Reduce Total Interest Paid
There are four main strategies for reducing the total interest you pay over the life of a loan:
- Negotiate a lower rate: A difference of even 1–2% can save thousands over a multi-year loan. Use your credit score as leverage, or use a broker to access wholesale rates.
- Choose a shorter term: A 3-year loan has higher monthly payments than a 5-year loan but costs substantially less in total interest. If you can afford the higher payment, shorter is better.
- Make extra repayments: Any extra amount paid reduces the principal immediately and reduces the interest charged in all future periods. Even an extra $50 per month can save hundreds to thousands over a loan term.
- Avoid redrawing: If your loan has a redraw facility and you have made extra repayments, avoid redrawing unless essential — withdrawing reduces the benefit of those extra payments.
Understanding Your Comparison Rate
In Australia, lenders are required to advertise a comparison rate alongside their headline interest rate. The comparison rate includes most fees and charges in a standardised annual percentage, making it easier to compare the true cost of different loans.
The comparison rate is calculated on a standardised $30,000 unsecured loan over 5 years. A low headline rate with high fees can have a higher comparison rate than a slightly higher rate loan with no fees — always compare the comparison rate.
However, note that the comparison rate is a standardised calculation and may not exactly reflect your situation if your loan amount or term differs significantly from $30,000 over 5 years.