💳 Personal Loan

How it works

A personal loan gives you a lump sum today that you repay in equal monthly instalments over a fixed term, with interest baked into every payment. Because the payment is fixed, the split changes over time: early payments are mostly interest, later payments are mostly principal. This is called amortization, and it is why the balance drops so slowly in the first year.

This calculator takes the amount borrowed, the annual interest rate, and the loan term, and works out the monthly payment, the total you will repay, and how much of that is interest. That interest figure is the real price of the loan — it is what you are actually paying for the privilege of borrowing.

The formula

Monthly payment: M = P × r(1+r)^n / ((1+r)^n − 1), where P is the loan amount, r is the monthly interest rate (annual rate divided by 12, as a decimal), and n is the number of monthly payments. Total repaid is simply M × n, and total interest is total repaid minus P. A lower rate or shorter term both shrink total interest.

Worked example

You borrow $15,000 at 8.99% annual interest over 48 months. The monthly rate is 0.0899/12 ≈ 0.0074917. Plugging in: M = 15000 × 0.0074917 × (1.0074917)^48 / ((1.0074917)^48 − 1) ≈ $373.32 per month. Over 48 months you repay $373.32 × 48 ≈ $17,919, so the loan costs you about $2,919 in interest. A 36-month term raises the payment to ~$477 but saves roughly $744 in interest.

Frequently asked questions

What is the difference between the interest rate and the APR?
The advertised rate is just the interest; the APR folds in most fees and expresses the true yearly cost as a single percentage. When comparing loans, always compare APRs, not headline rates.

Why does my balance barely move at first?
Because interest is charged on the full balance each month. With a big balance and a high rate, most of your fixed payment is eaten by interest until the principal shrinks enough for the balance to start falling quickly.

Should I pay the loan off early?
Usually yes, if there is no prepayment penalty — most Canadian personal loans from major lenders allow extra payments without penalty, but always check your contract. Every extra dollar goes straight to principal and shortens the loan.

The sticker price nobody reads

A loan has two prices: the payment, which everyone compares, and the total interest, which is what the borrowing actually costs. Loan interest is front loaded. Because interest is charged on the outstanding balance, and the balance is largest at the start, about 73 percent of all the interest on a typical five year car loan is paid in the first half of the term. That is why the balance feels stuck early on, and why extra payments in year one save far more than extra payments in year four. It also means trading in a car two years into a loan often leaves you owing more than the car is worth, since the principal has barely moved while the car has depreciated.

A worked example

Borrow $35,000 for a car at 6.9 percent. Spread over 60 months, the payment is $691.39 and the total interest is $6,484, so the car really costs $41,484 before insurance, fuel, and maintenance. Compress the same loan into 36 months and the payment rises to $1,079.10, but the interest falls to $3,848. The shorter loan asks for $387.71 more each month and returns $2,636 in saved interest, plus two years with no payment at all.

Rate shopping pays almost as well. Dropping the rate from 6.9 to 5.9 percent on that same 60 month loan cuts the interest by about $983. One percentage point, earned with a few phone calls, is worth roughly a thousand dollars.

Where borrowers get caught

• Shopping by monthly payment. Sellers can hit almost any payment by stretching the term. An 84 month car loan keeps you paying interest long after the car's best years, and often after you want to sell it.
• Financing the extras. Warranties, protection packages, and accessories rolled into the loan all earn interest for the dealer and the lender. A $2,000 add-on is not a $2,000 cost once it rides along for five years.
• Rolling an old balance forward. Folding what you still owe on the last car into the new loan means paying interest on a car you no longer own, and starting the new loan already underwater.
• Skipping the fine print. Check whether extra payments are allowed without penalty and whether the loan is open or closed. A slightly cheaper closed loan can cost more the moment your plans change.

Frequently asked questions

Is a longer loan with smaller payments ever a good idea?

Only when cash flow genuinely demands it, and even then it should be a deliberate trade. Stretching a $35,000 loan from three years to five adds about $2,636 in interest in the example on this page. If the lower payment is what keeps an emergency fund intact, that trade may be worth it.

How much is one percentage point of interest worth?

On a $35,000 loan over 60 months, dropping from 6.9 to 5.9 percent saves about $983 in interest, with no change to the car or the term. The exact figure grows with the loan size and shrinks with the term, which is why getting two or three competing quotes is worth an afternoon.

Should I pay off a loan early or invest the money instead?

Paying the loan off is a guaranteed, tax free return equal to the loan's rate. If your loan costs 7 percent or more, few safe investments beat that. Below that, it depends on the account: investing inside a TFSA with room available can make sense, provided your emergency savings stay untouched.

What is the difference between the interest rate and the APR?

The interest rate is the price of the loan itself. An APR, where one is shown, folds in certain lender fees so different offers can be compared on a single number. On many Canadian car loans the two are close, but on mortgages and credit products they can differ enough to change the decision.