How loan payments work
A loan payment looks simple, but the split between interest and principal changes every month. Understanding it helps you choose a better loan and pay it off sooner.
Open the tool: Loan payment calculator
Amortization in plain words
Each payment first covers the interest that built up since the last payment. Whatever is left reduces the balance. Because the balance is highest at the start, early payments are mostly interest. As the balance falls, more of each payment goes to principal, so the loan shrinks faster towards the end.
Equal payments or equal principal
With equal payments (annuity), every payment is the same. With equal principal, you repay the same part of the loan each time plus the interest on what is left, so payments start higher and fall. Equal principal costs less interest overall and is common in China, Russia and Japan.
Comparing loan offers
- Compare the APR, which includes fees, not only the interest rate.
- Check the total cost over the whole term, not just the monthly payment.
- Ask about early repayment fees before you sign.
- Check whether the rate is fixed or can change.
- Look at insurance or other products bundled with the loan.
Before you borrow
- Keep total debt payments below about a third of your take-home pay.
- Keep an emergency fund so a surprise does not mean missing a payment.
- Borrow only what you need, even if you are offered more.