Understand Loans and Financing
Understand principal, interest, loan terms, amortization, monthly payments, and total borrowing cost.
What Understand Loans and Financing gets you.
By the end of this upgrade, you will be able to break down any loan offer into principal, interest, term, and total cost before signing.
- A current or sample loan offer or statement
- A loan amortization calculator (app or spreadsheet)
- The full offer disclosure listing fees, term, and total cost
Run the upgrade.
- 01
Identify the principal
Confirm the actual amount being borrowed before any interest or fees are added.
- 02
Identify the interest rate and APR
Find both the stated interest rate and the APR, which includes certain fees and gives a more complete cost picture.
- 03
Identify the loan term
Confirm how many months or years you have to repay the loan, since term length directly affects both payment size and total interest paid.
- 04
Calculate the monthly payment
Use a loan calculator to compute the monthly payment from principal, rate, and term.
Monthly payment depends on principal, rate, and term (use an amortization calculator)
- 05
Understand amortization
Learn that early payments go mostly toward interest and later payments go mostly toward principal, and review an amortization schedule to see this pattern.
- 06
Calculate total cost of the loan
Multiply the monthly payment by the number of payments to see total amount paid, then compare it to the original principal.
Total cost = monthly payment x number of payments
- You can identify principal, rate, APR, and term on a real loan
- You have calculated the monthly payment
- You can explain how amortization shifts interest vs. principal over time
- You have calculated total cost over the life of the loan
Revisit when
- Considering a new loan or financing offer
- Considering refinancing an existing loan