How Loan Payments Are Calculated
Loan payments use the amortization formula: PMT = P × r(1+r)^n / ((1+r)^n - 1). Each payment covers interest on the remaining balance plus a portion of principal. Early payments are mostly interest; later payments are mostly principal.
Understanding Total Interest Cost
The total interest you pay depends on three factors: loan amount, interest rate, and term length. A $25,000 loan at 6.5% for 5 years costs $4,370 in interest. Extending to 7 years increases interest to $6,222 — a 42% increase.
Strategies to Reduce Loan Cost
Make extra principal payments, choose shorter loan terms, refinance to lower rates, or make bi-weekly payments instead of monthly (results in one extra payment per year). Even small extra payments significantly reduce total interest.