The loan payment formula
Payment = P × r ÷ (1 − (1 + r)−n), where P is the loan amount, r the monthly rate (APR ÷ 12) and n the number of months. A $20,000 loan at 7.5% for 5 years costs $400.76 a month and $4,046 in interest.
Shorter term or lower payment?
A longer term lowers the monthly payment but raises the total interest. The same $20,000 at 7.5% over 7 years is $307 a month, but the interest grows to about $5,770. If the budget allows it, the shorter term saves money.
Before you sign
- Compare the APR, not just the payment.
- Ask about prepayment penalties.
- Check that the payment fits your family budget with room to spare.