Quick answer: Borrowing 25,000 and paying 500 a month for 60 months means an interest rate of 7.42% a year (7.68% effective), with 5,000 of interest in total.
How it's calculated
A loan with equal monthly payments satisfies P = M × (1 − (1 + i)^−n) ÷ i, where P is the amount borrowed, M the payment, n the months and i the monthly rate. There is no closed formula for i, so the calculator finds it numerically, as the spreadsheet RATE function does.
The annual rate (APR) is 12 × i. The effective annual rate, (1 + i)^12 − 1, includes compounding within the year and is the better figure for comparing offers.
This reveals the true rate of flat-rate offers: a 'flat' 4% on 25,000 over 5 years is 5,000 of interest, the same payments as above, and the real rate is 7.42%. Check a payment the other way with the loan calculator.
Worked examples
- 25,000, 500 a month, 60 months: i = 0.6183% a month → APR 7.42%
- 200,000, 1,200 a month, 360 months: APR 6.007%
Frequently asked questions
Why is the real rate higher than the flat rate I was quoted?
A flat rate charges interest on the original amount for the full term, even though you repay part of it each month. The rate on the balance you actually owe is close to double.
Is this the APR?
It is the rate implied by the payments. A legal APR also counts fees; enter the loan minus any upfront fees to include them.
Does this work for Islamic finance?
Yes. It gives the profit rate implied by the amount financed and the instalments.
Should I include fees in the amount?
Enter the amount you actually receive after any upfront fees. The result then shows the true cost of the loan, including those fees.
What is the effective rate in the result?
The yearly rate with monthly compounding included. It is slightly higher than the nominal rate, for example 7.68% against 7.42%.
Can I use this for a buy-now-pay-later plan?
Yes, if the payments are equal and monthly. Enter what the item would cost in cash, the monthly payment and the number of months.