Basics
How Loan Interest Rates Are Calculated
From APR to amortization — exactly where the interest in your monthly payment comes from.
The interest you pay each month is not a flat fee. It is calculated on the balance you still owe, which is why early payments feel like they barely move the needle.
APR vs interest rate
The interest rate is the cost of borrowing the principal. The APR includes the interest rate plus fees (origination, administrative) expressed as a yearly percentage. APR is the apples-to-apples number when comparing offers.
How a payment is split
Take your APR, divide by 12 for the monthly rate, and multiply by your current balance — that is the interest portion. The rest of your payment goes to principal. As principal shrinks, the interest portion shrinks with it.
Why the term matters
A longer term means a lower monthly payment but more total interest. A 5-year loan at 10% costs roughly half as much in interest as a 10-year loan for the same amount.
