How loan interest works
Most personal, auto and student loans are repaid in equal monthly payments. Knowing how each payment is split between interest and principal makes it easier to compare offers and decide whether extra payments are worth it.
Interest is charged on what you still owe
Each month, the lender takes the annual rate, divides by 12 and applies it to the remaining balance. On 30,000 at 7%, the first month's interest is 30,000 × 0.07 ÷ 12 = 175.00. With a 60-month payment of 594.04, that leaves 419.04 to reduce the balance.
Why early payments are mostly interest
Because the balance is highest at the start, so is the interest. As the balance falls, less of each payment goes to interest and more to principal. Payments stay the same; only the split changes.
| 30,000 at 7%, 60 months | Interest | Principal |
|---|---|---|
| Month 1 | 175.00 | 419.04 |
| Month 30 | about 98 | about 496 |
| Last month | about 3 | about 591 |
Term length
A longer term spreads the balance over more payments, so each payment is smaller, but interest is charged for longer. The same 30,000 at 7% costs about 4,483 in interest over 48 months and about 8,034 over 84 months.
Extra payments
Anything paid on top of the regular payment reduces principal immediately, so every later month's interest is smaller. Extra payments early in the loan save the most. Check your agreement for prepayment penalties first.
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Reviewed October 2026 · How we build our calculators · Report an issue