Loan payment basics

A loan payment usually combines principal and interest. Principal is the amount borrowed, while interest is the cost of borrowing that money. For a fixed-rate amortizing loan, the payment is designed to pay the balance down over a set term.

Why term length matters

A longer term can reduce the monthly payment because the balance is spread across more months. The tradeoff is that interest has more time to accrue, which can raise the total cost of the loan.

How amortization works

Early payments often include more interest because the remaining balance is higher. Later payments usually include more principal. An amortization table shows that shift month by month.