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Frequently Asked Questions
How is a loan payment calculated?
Monthly payment = P × [r(1+r)ⁿ] / [(1+r)ⁿ−1], where P = principal, r = monthly interest rate (annual ÷ 12), n = number of payments. This is standard amortization math.
Does paying extra principal save money?
Yes, significantly. Extra principal payments reduce the balance faster, meaning less interest accrues. Even one extra payment per year on a 5-year loan can save 4–6 months of interest and shorten the term.
What is a good personal loan rate?
Rates vary by credit score. Excellent credit (760+): 6–10% APR. Good credit (700–759): 10–15%. Fair credit (640–699): 15–25%. Poor credit may see 25–36%.
How does loan term affect total cost?
Longer terms lower monthly payments but cost more in total interest. A $20,000 loan at 8% for 3 years costs ~$1,928 in interest; 7 years costs ~$4,686 — 2.4× more in interest for lower monthly payments.
$20,000 Loan Payment Reference
Monthly payment by rate and term
| Term | 6% | 10% | 15% |
|---|---|---|---|
| 3 yr | $608 | $645 | $694 |
| 5 yr | $387 | $425 | $476 |
| 7 yr | $292 | $333 | $389 |
| 10 yr | $222 | $264 | $323 |
Tips to Get a Lower Rate
- • Improve credit score before applying
- • Shop 3–5 lenders on the same day
- • Consider a secured loan (lower risk = lower rate)
- • Add a creditworthy co-signer
- • Choose a shorter term
Typical Loan Rates by Type
How Loan Amortization Works
When you take out an installment loan, each monthly payment is split between interest and principal. In the early months, most of your payment goes toward interest. As the principal decreases, less interest accrues and more of each payment reduces the balance — this is called amortization.
For example, on a $20,000 loan at 8% for 5 years, your first payment of $406 splits as ~$133 interest + $273 principal. By month 50, it\'s ~$5 interest + $401 principal. The total interest paid over 5 years is ~$4,332.
Loan Term: Short vs Long
| $20,000 at 10% | 3 Years | 5 Years | 7 Years |
|---|---|---|---|
| Monthly payment | $645 | $425 | $333 |
| Total repayment | $23,214 | $25,496 | $27,971 |
| Total interest | $3,214 | $5,496 | $7,971 |
| Interest ratio | 16% | 27% | 40% |
How Extra Payments Save Money
Any payment above your required monthly amount goes directly toward reducing principal — which in turn reduces future interest. This is one of the most powerful ways to cut the total cost of a loan.
Pay $50 extra/month
On a $20k, 5-year loan at 8%: saves ~$380 in interest and pays off ~3 months early.
Pay $100 extra/month
Same loan: saves ~$700 in interest and pays off ~6 months early.
Make 1 extra payment/year
Equivalent to paying biweekly — cuts a 5-year loan by 4–6 months.
Refinance at lower rate
Dropping from 10% to 7% on a $20k 5-year loan saves ~$1,700 total.