🎯 In 30 seconds: A loan is borrowed principal you pay back with interest. Compare loans by APR and total cost, not monthly payment. Steer clear of payday and car title loans: their yearly cost commonly runs around 300% to 400%.
The building blocks
| Principal | The amount you borrow and still owe |
| Interest rate | The yearly cost of borrowing, as a percent of principal |
| APR | The interest rate plus certain fees, expressed as a yearly rate. It is the better number for comparing offers |
| Term | How long you have to repay |
| Amortization | Paying the loan down through equal scheduled payments, each split between interest and principal |
Amortization: worked example
A $10,000 personal loan at 9% for 36 months has a payment of $318.00 a month. Each month’s interest is the remaining balance × 9% ÷ 12; the rest of the payment reduces principal.
| Payment | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | $75.00 | $243.00 | $9,757.00 |
| 2 | $73.18 | $244.82 | $9,512.18 |
| 3 | $71.34 | $246.66 | $9,265.53 |
| 12 | $54.18 | $263.81 | $6,960.69 |
| 24 | $29.44 | $288.56 | $3,636.27 |
| 36 | $2.37 | $315.63 | $0 |
Total interest: about $1,448. Interest is heaviest at the start, which is why extra payments early in a loan save the most. A longer term lowers the payment but raises the total interest.
Types of loans
- Fixed rate: the rate and payment stay the same for the whole term. Predictable.
- Variable rate: tied to an index, so the rate and payment can rise or fall. Often starts lower, carries the risk of increases.
- Secured: backed by collateral (a car, a home, a savings account). Usually a lower rate, but the lender can take the collateral if you stop paying.
- Unsecured: no collateral, such as most personal loans and credit cards. Usually a higher rate.
Co-signing and paying early
Co-signing means promising to repay someone else’s loan if they do not. According to the FTC, a co-signer may have to pay the full amount plus late fees or collection costs, and in most states the lender can come after the co-signer without first trying the borrower. The loan shows up on the co-signer’s credit report and can limit their own borrowing. Co-sign only for an amount you could afford to pay in full yourself.
Prepayment. Paying extra toward principal shortens the loan and cuts interest. Before you do, check the loan agreement for a prepayment penalty, and tell the lender the extra amount is for principal, not next month’s payment.
Loans to treat as warnings
- Payday loans. A typical fee is $15 per $100 borrowed for two weeks, which the CFPB says equals an APR of almost 400%. Borrow $300, repay $345 two weeks later, and many borrowers roll it over and pay the fee again.
- Car title loans. Your car is the collateral. CFPB research found typical APRs around 300%, and that about one in five borrowers of single-payment title loans had their vehicle seized.
- Buy now, pay later. Usually four payments over six weeks with no interest, but late fees apply, and several plans at once can add up faster than you notice. The CFPB suggests confirming you can afford every payment before you buy.