How Loan Interest Works
When you take out a loan, you repay the principal (amount borrowed) plus interest. Each monthly payment covers the interest accrued that month, with the remainder reducing your principal.
Types of Loans This Calculator Handles
- Personal loans: Typically 6-36% APR, 1-7 year terms
- Auto loans: Typically 4-10% APR, 3-7 year terms
- Student loans: Federal 4.99-7.54%, private 3-14%
- Business loans: Typically 6-30% APR
The Power of Extra Payments
Even small extra payments dramatically reduce total interest. On a $25,000 loan at 8.5% for 5 years:
- Minimum payment: $514/month, total interest $5,830
- +$50/month extra: Pay off 5 months early, save $463
- +$100/month extra: Pay off 10 months early, save $893