How loan payments work
Almost all installment loans — personal, auto, student — use amortization: a fixed monthly payment that covers that month's interest first, with the remainder reducing your balance. The payment is calculated as:
where P is the amount borrowed, r is the monthly rate (annual rate ÷ 12) and n is the number of payments. Because interest is charged on the remaining balance, the interest portion shrinks every month while the principal portion grows.
Typical loan rates and terms
| Loan type | Typical APR range | Typical term |
|---|---|---|
| Personal loan | 7% – 36% | 2 – 7 years |
| New auto loan | 5% – 10% | 3 – 6 years |
| Used auto loan | 7% – 14% | 3 – 6 years |
| Federal student loan | 5% – 9% | 10 – 25 years |
Rates vary widely with credit score, income and lender — always compare the APR (which includes fees), not just the headline interest rate.
Three ways to pay less interest
- Shorten the term. A 3-year loan costs far less total interest than a 6-year loan for the same amount, even at the same rate.
- Improve your rate. Even one percentage point matters — on $20,000 over 5 years, dropping from 9.5% to 8.5% saves about $580 in interest.
- Pay extra toward principal. Extra payments hit the balance directly, reducing every future month's interest charge.
Frequently asked questions
How do I calculate my monthly loan payment?
Use the amortization formula M = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1] — or just enter your numbers above and press Calculate. The result shows the payment plus total repayment and total interest.
What's the difference between APR and interest rate?
The interest rate is just the cost of borrowing. APR adds most fees (like origination charges), so it reflects the true annual cost — always compare loans by APR.
Does paying a loan off early save money?
Usually yes, because interest accrues on the remaining balance. Just confirm your lender doesn't charge a prepayment penalty.
What credit score do I need for a personal loan?
Many lenders approve from around 580–640, but the best advertised rates usually require 700+. A higher score can cut your rate by several points.