The interest rate is not the APR
The interest rate is what the lender charges on the balance. The APR folds in the fees — arrangement charges, broker fees, some insurance — and is the number that lets two offers be compared. A loan advertised at a lower rate with a large arrangement fee can easily cost more than one at a higher rate with none.
Compare APR to APR, and be aware that a headline "representative APR" is only offered to a proportion of successful applicants — typically 51%. The rate you are actually offered may be higher.
Where the money goes early on
Each payment is split between interest and principal, and early payments are mostly interest, because interest is charged on the balance and the balance is at its highest. On a 25-year mortgage the first few years barely touch the debt.
Which is what makes overpayments early so much more valuable than the same amount later: every pound off the principal now removes the interest it would have accrued for the remaining term.
What this does not include
The calculation covers principal and interest. A mortgage payment usually also carries insurance, property tax and possibly service charges; a car loan may include a balloon payment at the end. Check whether early repayment carries a penalty before planning around overpayments.
Frequently asked questions
What is the difference between the interest rate and the APR?
The rate is charged on the balance; the APR also includes fees. Compare APR to APR — a low rate with a large arrangement fee can cost more overall.
Why is so little of my early payment going to the balance?
Interest is charged on what you still owe, and early on that is nearly everything. The split shifts towards principal as the balance falls.
Is it worth overpaying?
Usually, and much more so early in the term, because you also remove all the future interest on that amount. Check first whether your agreement penalises it.
Does this include tax and insurance?
No — principal and interest only. A real mortgage payment usually adds insurance and property tax on top.
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