How loan interest works
With a standard fixed-rate amortizing loan, each monthly payment covers interest on the remaining balance and reduces the principal.
At the beginning of the loan, a larger portion of each payment generally goes toward interest. As the principal balance decreases, more of each payment goes toward reducing the principal.
How the interest rate affects total cost
A higher interest rate generally increases both the monthly payment and the total interest paid over the life of the loan.
The effect becomes especially significant when the repayment period is long because interest is charged over more monthly payments.
How the loan term affects interest
A longer repayment term can reduce the required monthly payment, but it generally increases the total amount of interest paid.
A shorter term can increase the monthly payment while reducing the number of payments and the total interest cost.