How loan interest works

Loans and debt · 3 min read · Updated 30 October 2026

In short: interest is what you pay to borrow. For a fixed-rate loan with equal monthly payments, each payment covers that month's interest first and the rest pays down the loan. A longer loan has smaller payments but usually costs more in total. Compare loans by their APR, which includes most fees.

Interest rate and APR

Interest rate: the yearly cost of borrowing, as a percentage of what you owe.
APR (annual percentage rate): the yearly cost including the interest rate and certain fees, such as some loan charges. US lenders must show the APR, so it's the better number for comparing offers.

How the monthly payment is worked out

Most car, personal and home loans are paid back in equal monthly instalments (in South Asia often called an EMI, equated monthly instalment). The payment is:

payment = P × r ÷ (1 − (1 + r)⁻ⁿ)

where P is the amount borrowed, r is the yearly rate divided by 12, and n is the number of monthly payments. Early payments are mostly interest; later ones are mostly the loan itself.

Why longer loans cost more

For example, borrowing $10,000 at 8% a year:

Monthly payment and total interest for $10,000 at 8%
Length	Monthly payment	Total interest
3 years	$313.36	$1,281
5 years	$202.76	$2,166
7 years	$155.86	$3,092

The longer loan has a lower monthly payment but costs much more in interest. Figures are rounded and for illustration only.

Before you borrow

Compare the APR and total cost from at least two or three lenders.
Ask about fees for paying early, late payments and setting up the loan.
Make sure the monthly payment fits your budget, with room for surprises.

Try different amounts and lengths with our loan and EMI calculator.

Handy tools

Loan and EMI calculator: monthly payment, total interest and a year-by-year table.

General information, not financial advice. Rules, fees and rates change and depend on your situation. Check with your bank, the provider or a qualified professional before you decide.