Loan payments explained: monthly interest, principal and total cost

Separate the borrowed amount from the purchase price

The principal is the amount financed after the deposit, plus any costs rolled into the loan. A 25,000 purchase with a 5,000 deposit starts at 20,000 before financed fees. Use the loan calculator with the actual financed balance and a rate appropriate to its assumptions, rather than substituting an APR that includes fees.

Calculate a fixed monthly payment

For equal monthly payments, payment = P × r ÷ (1 − (1 + r)^−n), where P is principal, r is the monthly interest rate and n is the payment count. A nominal annual rate of 6% gives r = 0.06 ÷ 12. Borrowing 20,000 for 60 months gives approximately 386.66 per month. With a zero rate, divide principal by the number of payments.

See where the first payment goes

Under this monthly model, first-month interest is 20,000 × 0.005 = 100. About 286.66 of the first payment reduces principal. Interest falls as the outstanding balance falls, assuming the rate and schedule remain unchanged. The CFPB explanation of amortization describes this changing split.

Compare total cost, not just the installment

At 6%, extending the same balance to 72 months lowers the payment to about 331.46, but raises total interest from roughly 3,199 to 3,865 before fees. Calculations use unrounded payments; an actual final payment may differ. Compare down payments, mandatory fees and balloon payments separately. Try the car loan calculator for purchase planning.

Check extra payments and your budget

An extra payment saves interest only under the applicable loan terms and allocation rules. Ask whether it reduces principal, whether interest is precomputed, and whether charges apply. Daily accrual and payment dates can change the result. Fit the installment into a budget that includes irregular expenses, rather than treating a lower monthly payment as proof that a loan is cheaper.