How loan repayments are worked out
A personal loan is repaid in equal monthly instalments over a fixed term. Each payment covers the interest due that month plus part of the capital, so the balance reduces steadily until the loan is cleared. The monthly figure depends on the amount borrowed, the interest rate (APR) and the length of the loan.
A longer term lowers the monthly payment but increases the total interest you pay overall. A lower APR reduces both.
Worked example
A £10,000 loan at 7.9% APR over 5 years costs about £202 a month, with roughly £2,140 of interest over the term — a total of about £12,140.
APR vs the interest rate
Loans are usually advertised with a representative APR (Annual Percentage Rate). APR is broader than the plain interest rate because it also includes compulsory fees, and it's the figure that lets you compare deals fairly. "Representative" means at least 51% of accepted applicants get that advertised rate or better — so the rate you're personally offered can be higher, depending on your circumstances.
What affects the rate you're offered
Lenders price a loan on risk. The main factors are your credit history, the amount you want to borrow, the length of the term, and how much other debt you already have. Mid-sized loans over medium terms often carry the lowest headline rates, while very small or very large amounts can cost more. Checking your eligibility with a "soft search" — which doesn't leave a mark on your credit file — lets you gauge your likely rate before you formally apply.
Secured vs unsecured loans
An unsecured personal loan isn't tied to an asset, so the lender relies on your creditworthiness. A secured loan (sometimes called a homeowner loan) is backed by your property, which can mean a lower rate or a larger amount — but your home is at risk if you don't keep up repayments. For most everyday borrowing, an unsecured loan is the simpler and safer choice.
How to cut the total cost
Two levers make the biggest difference: the rate and the term. A shorter term raises the monthly payment but sharply cuts the total interest. Overpaying, where your agreement allows it, clears the balance faster — though some loans carry an early-repayment charge, so check the terms first. Always compare the total amount repayable, not just the monthly figure, when weighing up deals.
Frequently asked questions
How much would a £10,000 loan cost per month?
At 7.9% APR over 5 years, about £202 a month, totalling around £12,140 with roughly £2,140 of interest.
How are loan repayments calculated?
Using a reducing-balance method: interest is charged on the outstanding balance each month, and a fixed monthly payment gradually pays off the capital.
What is APR?
APR (Annual Percentage Rate) is the yearly cost of borrowing including interest and certain fees. It lets you compare loans on a like-for-like basis.
Does a longer term cost more?
Usually yes. Spreading a loan over more years lowers the monthly payment but increases the total interest paid.
Is the rate I see the rate I'll get?
Advertised “representative” APRs must be offered to at least 51% of accepted applicants; your actual rate depends on your credit profile.