Interest is the cost of borrowing money. When you take out a loan, the lender gives you money now, and you agree to pay back the original amount plus interest over time.
Principal
Principal is the amount you borrow. If you borrow $20,000 for a car, your starting principal is $20,000.
Interest rate
The interest rate is the percentage charged for borrowing money. A higher rate usually means a higher monthly payment and more total interest over the life of the loan.
Loan term
The loan term is how long you have to pay the loan back. A longer term can lower the monthly payment, but it can also increase the total interest paid.
Amortization
Amortization is the process of paying a loan down over time. Early in many loans, a larger share of each payment goes toward interest. Later, more of each payment goes toward principal.
Why it matters
Understanding interest helps you compare loan offers. The lowest monthly payment is not always the cheapest loan overall.