Repaying the loan

With fixed-rate loans, your monthly payment stays the same over the life of the loan. Early on in the term of your loan, however, most of your monthly payment is paid towards interest, with a small portion of your payment allocated toward your principal balance. That gradually changes, though, and toward the end of your loan term your monthly payments mostly go toward repaying the principal. The full amount that borrowing costs will be disclosed in the Truth in Lending information.

If your monthly loan payment is $500, for example, $5 of your first payment might go toward the principal, while $495 goes toward interest. In the last payment, the situation could be reversed, with $5 going toward interest and $495 paying down the remaining principal.

With adjustable-rate loans, your monthly payment may change as the interest rate changes due to changes in the index rate. That can benefit you if interest rates fall and your payment is smaller. But in some periods interest rates may rise, which means your payment will probably be larger.

Late loan payments

Just as with a credit card, if you're late with your monthly repayments, you'll face stiff penalties. And the negative information will probably be available in your credit report, which damages your credit score and might make it harder for you to get a loan in the future. If you research your loan carefully and budget for the payments, though, a loan can be a great benefit to your financial life.