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How your loan payment is calculated

Personal loans, auto loans and most other installment loans are fully amortizing: you pay the same amount every month, and each payment covers that month’s interest first, with the rest going to principal. The formula is payment = P × r ÷ (1 − (1 + r)^−n), where P is the loan amount, r the monthly rate (the annual rate ÷ 12) and n the number of payments.

For example, a $15,000 loan at 12% for 60 months costs $333.67 a month. Over five years you pay $20,020 in total, of which $5,020 is interest. In the schedule you can see that the first payment includes $150 of interest, while the last one includes only about $3.

Interest rate vs APR: why the fee matters

Many online lenders charge an origination fee of 1% to 10% and subtract it from the money they send you. You still repay the full loan amount, so the fee raises your real cost. That is what APR (annual percentage rate) captures, and lenders must disclose it under the federal Truth in Lending Act.

Take the default example: $15,000 at 12% for 60 months with a $450 (3%) origination fee. You receive $14,550 but make the same $333.67 payments, which works out to an APR of about 13.35% and a total cost of $5,470. When comparing offers, compare APRs, not the advertised rates.

A fee hurts most on short loans. The same $450 fee on a 36-month loan pushes the APR from 12% to about 14.13%, because it is spread over fewer payments.

Shorter term or lower payment?

A longer term lowers the monthly payment but raises the total interest. Borrowing $15,000 at 12% costs $498.21 a month over 36 months with $2,936 of interest, or $333.67 a month over 60 months with $5,020 of interest. Pick the shortest term whose payment fits comfortably in your budget.

Your credit score has an even bigger effect. A $20,000, five-year loan at 8% costs $405.53 a month and $4,332 in interest; at 18% it costs $507.87 a month and $10,472 in interest. Checking your rate with several lenders through a soft credit pull can save thousands.

Using a personal loan to pay off credit cards

Debt consolidation is the most common reason people take out a personal loan. If you pay off $5,000 of credit card debt at 24% over three years, you pay about $2,062 in interest. Move it to a 36-month personal loan at 11% and the interest drops to about $893, with a payment of $163.69 instead of $196.16.

This only helps if the new APR, including any fee, is lower than your card rate and you stop adding new balances to the cards. Also check whether the loan has a prepayment penalty; most personal loans today do not.