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Loan interest is the cost of borrowing money, calculated as a percentage of what you still owe — but how that percentage is applied differs meaningfully between loan types.
Most common loans (mortgages, auto loans, personal loans) use amortization: each payment covers both interest and principal, but early payments are weighted heavily toward interest, with the principal portion increasing over the loan's life as the outstanding balance shrinks — this is why paying extra early in a loan's term saves more total interest than paying extra later.
The interest rate itself (APR, specifically, which includes certain fees alongside the base rate) is the standard number for comparing loan costs across different lenders — always compare APR, not just the headline interest rate, since the same headline rate can carry different total costs once fees are included.
Compound interest — where interest accrues on previously accrued interest, not just the original principal — matters most for revolving debt like credit cards, where unpaid interest gets added to the balance that future interest is calculated on, which is why credit card debt can grow faster than a simple percentage suggests if left unpaid.
Making extra payments toward principal (when a loan allows it without penalty) reduces the base that future interest is calculated on, shortening the loan and reducing total interest paid — checking whether your specific loan has prepayment penalties is worth doing before assuming this strategy is free to use.
Next step: confirm whether extra payments are applied to principal and whether any prepayment penalty applies before making them.
by oliviajones92021
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