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Monthly loan payments are calculated using the formula: M = P × [r(1+r)^n] / [(1+r)^n-1], where P is the principal (loan amount), r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments. For example, a $20,000 loan at 6% APR for 5 years: monthly rate = 0.5%, payments = 60, resulting in approximately $387 per month.

The interest rate is the basic cost of borrowing money, expressed as a percentage. APR (Annual Percentage Rate) includes the interest rate plus other fees like origination fees, closing costs, and mortgage insurance. APR gives you a more complete picture of the loan's true cost. For comparing loan offers, always use APR since it accounts for all costs.

Longer loan terms mean lower monthly payments but significantly more interest paid overall. For example, a $25,000 loan at 7% interest: a 3-year term costs about $2,800 in interest with $772/month payments, while a 5-year term costs about $4,800 in interest with $495/month payments. You pay 70% more interest for the longer term despite lower monthly payments.

An amortization schedule shows how each payment is split between principal and interest over the loan's life. Early payments go mostly toward interest, while later payments pay down more principal. Understanding this helps you see how extra payments reduce total interest—paying an extra $100/month on a $200,000 mortgage could save over $30,000 in interest and pay off the loan years early.

Choose a shorter term if you can afford higher monthly payments—you'll pay less interest overall and build equity faster. Choose a longer term if you need lower monthly payments for cash flow, but understand you'll pay more in total interest. A middle approach: take the longer term for flexibility, but make extra payments when possible to reduce interest.