by Tiffany Aliche
A practical guide to building financial wholeness, budgeting, saving, debt, and investing.
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How Loan Amortization Works
Every fixed-rate loan payment covers two things: interest on what you still owe, and a portion of the principal. Early in the loan, most of your payment goes to interest. As the balance shrinks, more goes toward principal. This is why extra payments early in a loan save dramatically more than extra payments later.
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Why Loan Term Length Matters
Choosing between a 3-year and 7-year loan isn't just about monthly payment size. Shorter terms mean higher monthly payments but far less total interest. A $25,000 loan at 7.5% costs about $4,700 in interest over 3 years, but over $14,000 in interest over 7 years. Compare your options on NerdWallet to find the best fit.