A year of payments on a $20,000 loan.

You have made twelve payments on time. You look at the statement and the balance has barely moved. Nothing is wrong with the loan, and nothing is wrong with you. This is how a level-payment loan works, and once you see the split it stops being a mystery.

The short answer

Every payment is the same size, but what it does changes over time. Each month the lender first charges interest on whatever you still owe. Only what is left of the payment reduces the balance. Early on you owe the most, so interest takes the biggest bite and the balance moves the least. Later the bite shrinks and the balance starts to fall quickly.

A worked example

Say you borrowed $20,000.00 at 18% over 60 months. The payment works out to $507.87 a month.

• Month 1. Interest on $20,000.00 for one month is $300.00. That leaves $207.87 to reduce the balance.
• After 12 payments. You have paid $6,094.42 in total. Of that, $3,383.56 went to interest and $2,710.86 reduced the balance.
• What you still owe. $17,289.14, about 86% of what you borrowed, after paying almost a third of the original amount.

It is not that the first payments are wasted. They bought the twelve months of interest that a loan of that size at that rate costs. The balance falls slowly first and fast last; by the final year most of each payment is principal.

What to look for on your statement

• Interest rate. The higher the rate, the bigger the early bite. At 9% instead of 18%, the same loan’s payment would be $415.17 and about $3,317 of the first year’s payments would have reduced the balance, against $2,710.86 here.
• Term. A longer term lowers the payment but stretches the slow phase. Sixty months of payments spends longer in the interest-heavy stretch than thirty-six.
• A precomputed-interest loan. Some loans, common on car loans and finance-company loans, fix the interest for the whole term at signing and add it to the balance. On those the statement balance is often the sum of the remaining payments, so it looks far higher than the principal, and the payoff quote is that figure minus a rebate. What is my payoff on a precomputed loan? shows the split.

If the balance is going up, not just staying high

A level-payment loan’s balance should fall a little every month. If yours is rising, one of these is usually the reason:

• The payment is smaller than the month’s interest. On a very high rate, a reduced or deferred payment, or a hardship plan, the unpaid interest is added to the balance. The tool tells you when a payment does not cover the interest.
• Fees were added. A late fee, a returned-payment fee or an insurance charge posts to the balance and then earns interest.
• A payment has not posted yet. A statement cut before the payment cleared shows a month of interest and no payment.
• It is a precomputed loan and the balance shown is the remaining payments, which include interest not yet charged.

Ask the lender for a transaction history that shows each payment split into interest, principal and fees. That settles it in one page.

Questions to ask your lender

1. How much of my last payment went to interest, and how much to principal?
2. Is this a simple-interest loan or a precomputed-interest loan?
3. If I pay extra this month, does all of it reduce the principal?
4. Is there any fee for paying the loan off early?

See it with your own numbers

Enter your loan amount, rate, term and the number of payments you have made in Where did my payments go?. It shows the split so far, what you still owe, and a month-by-month picture of when the balance starts to move. Or drop your latest statement on the page and it fills the numbers in for you, without the file leaving your browser.

Related: Level-payment amortization explains the formula with this example. Glossary: principal, amortization.

Educational tool, not advice. Your lender’s statement is the authoritative figure.