How a loan is repaid
A standard loan is repaid with the same payment every month. Each payment first covers the interest on what you still owe and the rest reduces the debt, so early payments are mostly interest.
What each monthly payment does
Interest first
The balance times the monthly rate is paid before anything else.
The rest reduces the debt
What is left of the payment lowers the balance you still owe.
Next month the interest is smaller
A smaller balance means less interest, so more of the same payment goes to the debt.
Extra payments help most early
Money paid toward the principal early stops interest from being charged on it for the rest of the term.
Where the payment comes from
The payment is chosen so the balance is exactly zero after the last one: payment = amount x r / (1 - (1 + r)^-n), with r the monthly rate and n the number of months. Our loan payment calculator shows it year by year.
Term and total cost
A longer term lowers the monthly payment but raises the total interest, because the balance stays high for longer. A shorter term does the opposite.
Rate, APR and fees
The quoted rate does not include fees. The APR combines both, so compare loans by APR and read what happens if you repay early.
Try the numbers
Questions
Why is most of my first payment interest?
Interest is charged on the remaining balance, which is highest at the start.
Does paying extra shorten the loan or lower the payment?
Usually the loan gets shorter, if the lender applies extra money to the principal. Ask what they do with it.
What is amortisation?
The schedule that splits each payment into interest and principal until the balance reaches zero.
Fixed or variable rate?
Fixed keeps the payment steady. Variable can start lower and rise or fall with market rates.