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How the instalment is derived

An equated monthly instalment keeps the payment constant across the term while the split between interest and principal shifts. The formula is P times r times (1+r)^n, divided by ((1+r)^n minus 1), where P is the principal, r is the monthly interest rate (the annual rate divided by 12 and by 100) and n is the number of months. Each payment first covers the interest accrued that month on the outstanding balance; whatever remains reduces the principal.

Early payments are almost all interest

Because interest is charged on the outstanding balance, the first instalments on a long loan go overwhelmingly to interest and barely reduce what you owe. On a 20-year home loan at a typical rate, more than half of each early payment is interest, and the crossover point where principal exceeds interest arrives years in. This is why paying a loan for several years can leave the balance stubbornly high, and it is worth seeing in the amortisation table rather than being surprised by it.

Prepayment works because it attacks principal

A lump sum paid against principal removes all the future interest that balance would have generated, so prepaying early saves dramatically more than prepaying late. Even small regular additional payments shorten the term substantially. Two things to check before committing: whether the lender charges a prepayment penalty, and whether the extra amount reduces the term or the instalment, since reducing the term saves far more interest.

Fixed versus floating

A fixed rate keeps the instalment predictable for the fixed period. A floating rate moves with a benchmark, and lenders commonly hold the instalment constant while extending or shortening the term instead, which hides the change. If your rate has moved and the payment has not, check whether the term has quietly grown.

The advertised rate is not the whole cost

Processing fees, insurance bundled with the loan, documentation and legal charges all add to the real cost. Compare the annual percentage rate rather than the headline interest rate, since the APR is intended to fold those in. This calculator computes on interest alone, so add fees separately when comparing offers.