Every loan payment splits in two: interest for the month just past, and principal that reduces what you owe.
Step 1: Let's Learn
Read it, or press Listen and follow the words.
The split shifts
Early payments are mostly interest, because the balance is large. Late payments are mostly principal.
The amortisation schedule
A table of every payment, showing the split and the remaining balance. It is worth reading before signing.
Total cost
Multiply the payment by the number of payments. Subtracting the amount borrowed gives the total interest.
A longer term is not cheaper
Stretching a loan lowers the monthly payment and raises the total cost, often substantially.
Extra payments
Money paid above the required amount goes entirely to principal, which cuts every future interest charge.
Where each payment goes
An amortised loan has equal payments split between interest and principal. Early payments are mostly interest because the balance is large; later ones are mostly principal. The split shifts gradually throughout.
The amortisation schedule
A table showing, for each payment, the interest, the principal and the remaining balance. Reading one is the clearest way to see how a long loan distributes its cost across the term.
A longer term lowers the payment and raises the total
Extending a loan reduces each payment and increases the total interest, often substantially. The monthly figure and the total cost move in opposite directions, and advertisements quote the monthly one.
Extra payments go against principal
A payment above the required amount reduces the balance directly, which reduces all future interest. Because of compounding, early extra payments have far more effect than the same amount paid later.
Step 2: Try It Yourself
Tap and try it out.
Interest
Principal
Interest has the most. It has 40 more than Principal.
Step 3: Watch an Example
One step at a time.
Watch Elena Split a Payment
A $20000 loan at 6% APR, with a monthly payment of $400.
- Step 1
The monthly rate is 6 ÷ 12 = 0.5%.
Step 4: Your Turn
Practice makes it stick.
The Split
Problem 1 of 2
A $20000 balance at 0.5% a month. Interest this month, in dollars?
dollars
The Total
Problem 2 of 2
$400 a month for 60 months. Total paid, in dollars?
dollars
Follow the Payment
1 of 8
APR 6%. Monthly rate in percent?
2 of 8
$15000 at 0.5% a month. Interest in dollars?
3 of 8
Payment $400, interest $100. Principal part in dollars?
4 of 8
$300 a month for 48 months. Total paid in dollars?
5 of 8
Borrowed $12000, total paid $14400. Total interest in dollars?
6 of 8
A longer term means a higher or lower total cost? 1 higher, 2 lower.
7 of 8
Sort each statement by where in a loan it applies.
Tap something to move it.
- Empty
- Empty
8 of 8
$500 a month for 36 months. Total paid in dollars?
Step 5: Quick Check
Show what you know.
Question 1 of 2
$10000 at 0.5% a month. Interest this month, in dollars?
Question 2 of 2
Where does an extra payment go?
What You Learned
- Each payment splits into interest for the month and principal.
- Early payments are mostly interest, because the balance is large.
- Total cost is payment times number of payments; a longer term costs more.