How Loan Interest Works
Loan interest is the cost of borrowing money. A loan usually combines principal, interest, and a repayment schedule.
How the math works
A loan payment is calculated with the amortization formula, which spreads principal and interest across equal payments so that every payment pays some interest first and some principal second. Early payments are interest-heavy because interest is charged on the outstanding balance, which is largest at the start.
Worked example
On a $50,000 loan at 6.5% over 5 years, the payment is about $978/month. In month 1, roughly $271 goes to interest and $707 to principal. By the final month, that split has almost fully reversed.
What to watch for
- Extra principal payments reduce future interest, not just the balance shown today
- A missed or late payment can add fees the calculator does not model
- Rate type (fixed vs. variable) changes whether this schedule stays accurate over time
Practical takeaway
Use the amortization schedule, not just the monthly payment, to see how much of your money is actually going toward interest in the early years.