A loan is money you receive now and repay later, with an extra charge for using it. Every bank loan in Pakistan, whether a personal loan, a car loan or home financing, is built from the same parts. Once you know them, you can compare offers and read a repayment schedule.
The parts of a loan
| Term | What it means |
|---|---|
| Principal | The amount you borrow and must pay back. |
| Interest | The price of borrowing, charged on the principal you still owe. |
| Rate | Interest expressed as a percentage of the balance per year. |
| Term (tenor) | How long you have to repay. |
| Instalment | The regular payment, usually monthly. |
| Collateral | An asset the lender can take if you stop paying. |
| Fees | Processing, documentation, insurance or late-payment charges. |
The outstanding balance is the part of the principal you have not yet repaid. Interest for each period is normally calculated on this balance, not on the original amount. As you repay principal, the interest charge for later periods falls.
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How loan interest works
Fixed and floating rates
With a fixed rate, the rate stays the same for the agreed period, and your instalment is predictable.
With a floating (variable) rate, the rate is reset at set intervals. In Pakistan, many bank loans are priced as a benchmark plus a margin. The benchmark is often KIBOR (Karachi Interbank Offered Rate), and the margin is the bank's spread on top. When the benchmark moves, your rate and instalment move too.
Why the policy rate matters
The State Bank of Pakistan sets the policy rate. Benchmarks such as KIBOR tend to follow it. The latest decision on record: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). This is not your loan rate. Your rate is what the lender offers in writing. See SBP rates and economy for how the policy rate feeds through.
Nominal rate and effective cost
The advertised rate is often a nominal annual rate. Monthly compounding, upfront fees and compulsory insurance raise the real cost. APR and Effective Rate and Effective Loan Rate explain how to convert an offer into a single comparable figure.
How repayments are built
There are two common schedules:
- Annuity (equal instalments). Each payment is the same. Early payments are mostly interest. Later payments are mostly principal.
- Differentiated (declining instalments). You repay the same slice of principal each period, plus interest on the remaining balance. The payments start higher and fall over time. Total interest is usually lower than with an annuity on the same terms.
Loan Payment Types compares them in detail.
Use the calculator to see both methods side by side. Enter the amount, rate and term. It shows the instalment, total interest and a yearly schedule. It can also show the effect of an early repayment.
Fill in the empty fields to see the result.
| Year | Paid | Interest paid | Balance |
|---|
Annuity: A = P × i / (1 − (1 + i)^−n), i = annual rate / 12. Declining: P / n of principal + interest on the remaining balance. Fees and insurance are not included.
All figures in the calculator come from your inputs. Use the rate and fees from the lender's written offer, not an estimate.
Collateral: secured and unsecured loans
A secured loan is backed by an asset. In home financing, it is the property. In a car loan, it is usually the vehicle, often registered with the bank's interest until you finish paying. If you default, the lender can claim the asset. Secured loans usually carry lower rates because the lender's risk is lower. See Mortgage Basics.
An unsecured loan has no asset behind it. Most personal loans and credit cards work this way. The lender relies on your income and repayment record, so rates are usually higher and approval depends more on your credit score.
Islamic banks offer financing through structures such as murabaha (cost-plus sale), ijarah (leasing) or diminishing musharakah (shared ownership). The profit is set differently, but you should still compare the total amount you will pay. See Islamic finance.
The total cost of a loan
The instalment alone does not tell you the cost. Add up:
- All instalments over the full term.
- Upfront fees: processing, documentation, valuation, stamp duty.
- Required insurance, such as life or vehicle cover.
- Possible charges: late payment, early settlement, rate resets on floating loans.
Total cost minus principal is what borrowing really costs you. A longer term lowers the monthly payment but usually raises total interest. The calculator shows this when you change the term and keep everything else the same.
Early repayment
Paying part of the principal early cuts the balance on which interest is charged. You can then either shorten the term or reduce later instalments. Some lenders charge a fee for early settlement, so check your agreement. Early Loan Repayment explains the choice.
Before you sign
- Ask for the rate in writing. Check whether it is fixed or floating and what benchmark it follows.
- Ask for the full repayment schedule and a list of all fees.
- Check how your instalment fits your income. See Debt-to-Income Ratio.
- Read what happens if you miss a payment.
- Keep an emergency fund so one bad month does not lead to default.
- Be careful with fast app-based loans and repeated small borrowing. See Debt Traps.
Do not borrow to fund leveraged forex or CFD trading. Leveraged trading can lose money fast, and the loan stays due even after the money is gone. For the legal position on offshore trading platforms in Pakistan, see Law and regulators.
Frequent questions
How do loans work in simple terms?
You borrow a principal and repay it over an agreed term in instalments. Each instalment includes interest on the balance you still owe.
Why is most of my early payment interest?
On an annuity loan the balance is highest at the start, so the interest part is largest. As the balance falls, more of each payment goes to principal.
Is a lower monthly instalment always cheaper?
No. A lower instalment often comes from a longer term, which usually means more total interest. Compare total cost, not only the monthly payment.
What decides the rate on a bank loan in Pakistan?
The benchmark (often linked to the SBP policy rate), the bank's margin, whether the loan is secured, and your income and credit record. Only the lender's written offer gives your actual rate.
Does a floating rate change my instalment?
Yes. When the rate is reset, the lender recalculates the instalment or the term on the remaining balance.