When you take out a personal loan, you make fixed monthly payments, and need to repay both the loan principal ꦜand interest. The loan principal is the amount of money you get through the loan, and the interest is the cost of borrowing that money from a lender.
When you mak⛄e loan payments, some of the money goes toward the principal and some goes towar🍬d the interest charges.
- Is the loan principal different from interest?
- Where do you find your loan principal?
- How do you repay the loan principal?
- What are principal-only payments?
- How do lenders determine the interest you pay?
Is the loan principal different from interest?
Yes. Interest is paid on top of your loan principal, and is typically expressed as a percentage of your loan amount. Personal loans have a𝄹n annual percentage rate (APR), which factors in your int🔯erest rate for the year and any fees. It gives you a more complete picture of the cost of borrowing.
It’s best to get the lowest interest rate💧 possible, because the costs can add up quickly. For example, if you take out a $15,000 personal loan with an 18% interest rate and five-year loan term, you’ll pay $381 monthly and a total of $7,854 in interest over the life of the loan. This means you’ll have paid $22,854 when all is said and done.
Meanwhile, if you got a 12% interest rate for that same loan, you’d pay $3🎃34 monthly and $5,020 in interest, for a total payment of $2ꦰ0,020.
Where do you find your loan principal?
You can review your monthly personal loan statement or online account to understand what yourꦗ current loan principal is, as well as what you owe for interest and any fees. If you can’t find it, contact your lender.
How do you repay the loan principal?
To repay the principal loan amount, all you have ಌto do is make yo♐ur monthly loan payments. However, if you want to pay down the loan faster — and spend less on interest — you can make additional payments each month.
You can make an extra payment at the same time as your normal payme🌄nt to ensure the extra money goes toward the principal, not interest. This is because no new interest will have had a chance to accru🦂e yet. Reach out to your lender and make it clear that you want the extra payment to apply to the principal balance, not interest charges.
If you make your loan payments online or through a lender’s mobile app, choo🌳se the appropriate option for the additional payment to apply to the principal balance. If you make your loan payments via regular mail, consult your lender to find out how to appropriately earmark your check to apply the extra payment to the loan principal.
| Note: Before you make extra payments, it’s important to check if your lender charges a prepayment penalty. This is a fee that some lenders use to make up for the interest they lose out on when you pay off part of all of your loan early. Repaying your loan early may not be worth it if the lender charges an expensive fee. |
What are principal-only payments?
A principal-only payment is a payment that only goes toward the principal balance, not the interest. Your typical monthly payments include interest. Making principal-only payments in addition to your regular monthly pa🌜yments can h✃elp you pay down your loan faster. And since you’re reducing your loan principal, you can save on interest — the smaller your loan balance, the less interest accrues.
How do lenders determine the interest you pay on your loan principal?
The interest rate a lender charges affects the overall cost of borrowing money. The higher your interest rate, the more you’ll pay for the loan. Some factors that lenders use when determining your interest rate include:
- Credit score: If you have a high credit score, you’ll probably qualify for lower interest rates, since a high credit score indicates you’re likely to make your loan payments on time. A good FICO credit score is 670 or higher. While some personal loan lenders accept borrowers with fair or bad credit scores, it’s unlikely you’ll qualify for the best rates. If you can wait to borrow money, it may make sense to hold off on applying for a personal loan while you work on improving your credit.
- Income: Your income can also be an indicator of your ability to make loan payments. If you have a higher income, lenders may perceive you as less of a risky borrower, and you may qualify for a lower interest rate.
- Debt-to-income (DTI) ratio: Lenders also look at how much debt you currently have. They do this by analyzing your DTI, which is your monthly income compared to your total monthly debt commitments, expressed as a percentage. To calculate your DTI, divide your total monthly debt payments by your gross, or pretax, monthly income. If you have $2,000 in total debt payments each month and your income is $5,500, your DTI is 36% (2,000/5,500 = 0.36). Lenders often look for a DTI of 36% or lower, but this varies.
Other factors, like your repayment t𝔉erm, also affect the amount of inte𒆙rest you pay on a personal loan. With a longer repayment term, you’ll have lower monthly payments but pay more in interest in the long run. With a shorter repayment term, you’ll have higher monthly payments but pay less in overall interest.