How loan payments work
Each payment covers the interest that built up that month, and the rest reduces the balance. As the balance shrinks, less of each payment goes to interest, so the loan pays down faster toward the end.
Ways to pay less interest
- Choose a shorter term. The payment is higher, but total interest drops sharply.
- Improve the rate. Even one percentage point makes a real difference on a multi-year loan.
- Pay extra toward principal. Check that your loan has no prepayment penalty first.
Frequently asked questions
What's the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal. APR also includes certain fees, so it's usually a little higher and is better for comparing offers.
Is a longer car loan a good idea?
Longer terms lower the monthly payment but increase total interest, and you may owe more than the car is worth for longer. Compare a 48- or 60-month term with a 72- or 84-month term above.