Key Loan Components
Understanding the key components of a loan is the first step to financial literacy. The principal is the amount you borrow, the interest rate is the cost of borrowing, and the term is the time you have to repay the loan.
How Payments are Calculated
Your periodic payment is calculated based on these three factors. A portion of each payment goes toward the principal, and the rest goes toward interest. Over time, the principal portion of your payment increases while the interest portion decreases.
Tips for Smart Borrowing
- Shop Around: Compare offers from multiple lenders to find the best interest rate.
- Make a Down Payment: A larger down payment can significantly reduce your borrowing costs.
- Choose a Shorter Term: A shorter loan term means higher monthly payments but less total interest paid.