Free tool
What does that loan really cost?
Enter the amount, rate, and term to see the monthly payment, the total interest over the life of the loan, and a year-by-year amortization schedule.
Nominal annual rate (APR). Set 0 for an interest-free loan.
Fractions work: 0.5 is six months.
Monthly payment (EMI)
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Principal vs interest
| Principal borrowed | — |
| Total interest paid | — |
| Total repaid | — |
| Interest as % of principal | — |
Yearly amortization
| Period | Principal | Interest | Balance |
|---|
Early payments are mostly interest; later ones are mostly principal. The balance falls slowly at first, then faster.
How the monthly payment is worked out
An amortizing loan is repaid in equal monthly instalments (the EMI, or equated monthly instalment). Each payment covers the interest accrued that month plus a slice of principal. The standard formula is:
EMI = P · r · (1 + r)^n / ((1 + r)^n − 1)where P is the principal, r is the monthly interest rate (annual rate ÷ 12), and n is the number of monthly payments (years × 12). At a 0% rate the formula reduces to a simple split, P ÷ n.
Worked example
Meridian Trading Co. borrows AED 200,000 for a delivery van at 8% over 5 years. Monthly rate = 8% ÷ 12 = 0.667%, over 60 payments. EMI works out to about AED 4,055 a month. Total repaid is roughly AED 243,300, so the interest cost is around AED 43,300, about 21.7% of the amount borrowed.
Why early payments barely touch the balance
Interest is charged on the outstanding balance, which is highest at the start, so early instalments are mostly interest and only chip away at principal. As the balance falls, the interest portion shrinks and more of each payment goes to principal. The yearly schedule above shows this: the balance drops slowly in year one and accelerates toward the end.
This is why paying a lump sum off early saves so much: it cuts the balance that all future interest is charged on. A small overpayment in year one is worth far more than the same amount in the final year.
Recording a loan properly
A loan is not income when it lands, and a repayment is not a single expense. The cash you receive is a liability; each instalment splits between reducing that liability (principal) and an interest expense. Getting that split right is what keeps your balance sheet and your profit honest. Vinance handles loan accounts, splits each repayment automatically, and keeps the outstanding balance on your balance sheet: see accounting & ledger and banking & reconciliation. Before you take the loan, check it against your cash runway.
Frequently asked questions
How is the monthly loan payment calculated?
By the standard amortization formula: EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the principal, r is the monthly rate (annual ÷ 12), and n is the number of monthly payments. It produces equal payments that fully clear the loan over the term.
What is an EMI?
EMI stands for equated monthly instalment, a fixed monthly payment that covers both interest and principal. Every payment is the same amount, but the split shifts from mostly interest early on to mostly principal near the end.
Why do I pay so much interest early in the loan?
Interest is charged on the outstanding balance, which is largest at the start. So early instalments are mostly interest and reduce the principal slowly; later ones are mostly principal. This is also why early overpayments save the most.
Does this include fees or insurance?
No. It models a plain fixed-rate amortizing loan. Arrangement fees, insurance, variable rates, and balloon payments change the real cost, so always check your loan agreement for the full picture.
How is a loan recorded in accounting?
The money received is a liability, not income, and each repayment splits into principal (reducing the liability) and interest (an expense). Vinance tracks the loan account and splits repayments automatically; see accounting & ledger.
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