Loan cost: payment, interest and overpayment

Short answer #

A payment contains interest and principal. Only interest plus fees are finance cost; principal reduces debt. Extra payment saves future interest and can shorten the term.

Important variables #

• Loan amount
• Annual percentage rate
• Term and fees
• Extra monthly payment

Worked example #

On a €30,000 five-year loan, the balance falls each month. An extra €100 does not merely remove the final month; it immediately reduces the interest base.

Break-even: What changes the result? #

Early overpayment has more effect than late overpayment. At zero interest it shortens the term but saves no interest.

Common mistakes #

• Counting every payment as interest cost
• Leaving fees out of total cost
• Assuming overpayment rights
• Carrying rounded balances forward

Sources & assumptions

• RATIOXA — Methodology and formulas (2026-08-17)