When you take out a personal loan, you make fixed monthly payments, and need to repay both the loan principal and interest. The loan principal is the amount of money you get through the loan, and the interest is the cost of borrowing that money from a lender.
When you make loan payments, some of the money goes toward the principal and some goes toward the interest charges.
Yes. Interest is paid on top of your loan principal, and is typically expressed as a percentage of your loan amount. Personal loans have an annual percentage rate (APR), which factors in your interest rate for the year and any fees. It gives you a more complete picture of the cost of borrowing.
It’s best to get the lowest interest rate possible, because the costs can add up quickly. For example, if you take out a $15,000 personal loan with an 18% interest rate and five-year loan term, you’ll pay $381 monthly and a total of $7,854 in interest over the life of the loan. This means you’ll have paid $22,854 when all is said and doner.
Meanwhile, if you got a 12% interest rate for that same loan, you’d pay $334 monthly and $5,020 in interest, for a total payment of $20,020.
You can review your monthly personal loan statement or online account to understand what your current loan principal is, as well as what you owe for interest and any fees. If you can’t find it, contact your lender.
To repay the principal loan amount, all you have to do is make your monthly loan payments. However, if you want to pay down the loan faster — and spend less on interest — you can make additional payments each month.
You can make an extra payment at the same time as your normal payment to ensure the extra money goes toward the principal, not interest. This is because no new interest will have had a chance to accrue yet. Reach out to your lender and make it clear that you want the extra payment to apply to the principal balance, not interest charges.
If you make your loan payments online or through a lender’s mobile app, choose the appropriate option for the additional payment to apply to the principal balance. If you make your loan payments via regular mail, consult your lender to find out how to appropriately earmark your check to apply the extra payment to the loan principal.
| Note: Before you make extra payments, it’s important to check if your lender charges a prepayment penalty. This is a fee that some lenders use to make up for the interest they lose out on when you pay off part of all of your loan early. Repaying your loan early may not be worth it if the lender charges an expensive fee. |
A principal-only payment is a payment that only goes toward the principal balance, not the interest. Your typical monthly payments include interest. Making principal-only payments in addition to your regular monthly payments can help you pay down your loan faster. And since you’re reducing your loan principal, you can save on interest — the smaller your loan balance, the less interest accrues.
The interest rate a lender charges affects the overall cost of borrowing money. The higher your interest rate, the more you’ll pay for the loan. Some factors that lenders use when determining your interest rate include:
Other factors, like your repayment term, also affect the amount of interest you pay on a personal loan. With a longer repayment term, you’ll have lower monthly payments but pay more in interest in the long run. With a shorter repayment term, you’ll have higher monthly payments but pay less in overall interest.
Related: Learn more about getting a personal loan on Credible.com