Practical guide to installment loans

1. Understand the loan amount and proceeds

Principal is the amount on which the loan repayment schedule is based. If you sign for a $20,000 loan but a $600 fee is deducted from the proceeds, you might receive only $19,400 while still repaying the full $20,000 principal. Confirm whether a fee is financed, withheld or paid separately; each treatment changes the math.

2. Interest rate versus APR

The note interest rate drives a simple fixed-rate amortization schedule. APR is a standardized annual borrowing-cost measure that can include certain fees, depending on loan type and applicable disclosure rules. Two loans with identical stated rates can have different APRs if one has additional finance charges. Use lender disclosures for an authoritative APR; our calculator does not infer a legal APR from fees.

3. Compare equal terms first

To isolate the impact of rate, compare offers with the same principal and term. To isolate the impact of term, hold principal and rate constant. Otherwise a lower payment may hide a longer obligation and higher total interest. Record payment, total scheduled repayment, fees, net proceeds, any collateral requirement and late charges in one comparison.

4. Read the repayment and prepayment provisions

Ask whether the loan uses simple interest, precomputed interest, a variable rate or a fixed amortizing schedule. Confirm whether there is a prepayment penalty, how extra funds are applied and whether a lender will advance the due date instead of reducing principal. Our extra-payment model assumes each extra dollar immediately reduces outstanding principal.

5. Stress-test your budget

Do not use a lender approval amount as your household budget. Include rent or mortgage, utilities, insurance, transportation, food, emergency savings and other obligations. An affordable payment is one you can sustain when an unexpected expense occurs. The debt-to-income tool is only a ratio; it is not an approval test.

6. Know when the model is not appropriate

Credit cards, interest-only loans, balloon payments, adjustable-rate loans, irregular payment schedules and mortgages with escrow require different assumptions. Mortgages also commonly involve property taxes, homeowners insurance and possibly mortgage insurance. Avoid treating the installment calculator as a complete quote for those products.

Checklist before signing

• Verify the actual amount financed and the cash you will receive.
• Check the payment amount, first due date, number of payments and total of payments.
• Review APR, finance charges, origination fees and late fees.
• Ask about extra payments and prepayment penalties.
• Keep a copy of the signed agreement and disclosures.