One fixed payment, two parts
A car loan, student loan or mortgage usually has the same payment every month. Each payment first covers the interest charged on the balance that month, and the rest pays the balance down. That split changes every month, and a table of it is called an amortization schedule.
A worked example
Borrow $20,000 at 6% a year for 5 years. The monthly rate is 0.5% and the payment works out to $386.66.
- Month 1: interest is $20,000 × 0.5% = $100, so only $286.66 goes to the balance.
- As the balance falls, each month's interest falls too, and more of the same payment goes to the balance.
- By the last payment almost all of it is principal. Over the 60 months you pay about $3,199 in interest.
The Amortization Schedule Calculator shows this month by month for any loan.
What an extra payment does
Money paid on top of the regular payment goes straight to the balance, so every later month charges interest on less. In the example above, an extra $100 a month pays the loan off in 47 months instead of 60 and cuts the interest to about $2,444. Check first that your lender applies extra payments to the principal and does not charge for paying early.
Calculators for each kind of loan
The Loan Calculator works out the payment for any loan. The Car Loan Calculator adds the down payment, trade-in, sales tax and fees, and the Student Loan Calculator shows how much time and interest an extra payment saves.