Key takeaway
Compare loans by total interest and APR, not the monthly payment alone; a longer term hides a higher cost.
Key takeaway
A loan is borrowed money you repay with interest over time. The payment depends on three things—amount, rate, and term—and small changes to any one reshape what you pay. Understand the payment before you sign.
What a loan actually is
A lender gives you a lump sum; you agree to pay it back in installments that cover the principal (the amount borrowed) plus interest (the cost of borrowing). Most personal, auto, and student loans are amortizing: each payment is partly interest and partly principal, with the principal share growing over time.
Three inputs drive every loan payment:
- Principal: how much you borrow.
- Interest rate: the yearly cost, expressed as a percentage.
- Term: how long you take to repay it, in months or years.
The Loan Calculator shows the monthly payment and total interest for any combination.
How the three inputs interact
A worked example: borrow $20,000.
- At 6% for 5 years: payment about $387, total interest about $3,199.
- At 6% for 3 years: payment about $609, total interest about $1,908.
- At 9% for 5 years: payment about $415, total interest about $4,914.
Same $20,000, very different cost. A shorter term saves interest but raises the monthly payment; a higher rate quietly adds thousands. The calculator makes the trade-off visible before you commit.
The mistake everyone makes: staring only at the payment
A long term can lower the monthly number enough to feel affordable while inflating the total interest paid. Lenders know this, so the payment is the headline and the total cost is buried.
Other errors:
- Ignoring fees: origination fees and prepayment penalties change the real cost.
- Confusing APR and rate: APR includes fees and is the truer comparison number.
- Skipping the total-interest line: a low payment over a long term can cost more than a higher payment over a short one.
- Not checking prepayment: paying extra early cuts interest, but only if the loan allows it without penalty.
How to borrow well
- Quote the full cost, not just the payment—use the Loan Calculator to see total interest.
- Shorten the term if the payment fits: less interest for the same loan.
- Compare APR, not rate, across offers so fees are included.
- Pay extra toward principal when allowed; it compounds into real savings.
- Match the loan to the asset: a short-lived purchase does not deserve a long loan.
Related next steps
Model any loan with the Loan Calculator. To see how extra payments cut interest, the Extra Payment Mortgage Calculator applies the same idea to a mortgage, and the Debt-to-Income Ratio Calculator shows whether the payment fits your budget.