Before You Borrow: Understanding Loan Calculations

The True Cost of Borrowing

A $10,000 loan at 5% interest doesn't cost $500. The actual cost depends on the term length, payment frequency, and whether interest is simple or compound.

Key Terms Explained

• Principal: The amount you borrow.
• Interest Rate: The annual percentage charged on the principal.
• Term: How long you have to repay (months or years).
• APR: Annual Percentage Rate—includes fees and gives the true yearly cost.
• Amortization: How payments are split between principal and interest over time.

Why Longer Terms Cost More

A 5-year car loan has lower monthly payments than a 3-year loan, but you pay more total interest. Always compare the total cost, not just the monthly payment.

Example Comparison

$20,000 loan at 6% interest:

• 3-year term: $608/month, $1,899 total interest
• 5-year term: $387/month, $3,199 total interest

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