Credit & debt · Module 3 of 8
What a loan is made of
Where each loan payment goes, the fees hiding outside the rate, and how to compare two offers fairly.
Key terms in What a loan is made of
- Principal
Principal is the amount of money originally received from a lender that the borrower agreed to pay back, not counting interest. Each payment on an installment loan is generally divided between interest and principal. As principal is repaid, the balance shrinks, and interest is charged on what remains rather than on the original sum.
Source: Consumer Financial Protection Bureau, Mortgage Key Terms
- Amortization
Amortization is the process of paying off a loan through regular payments over time so that the amount owed decreases with each payment. A lender typically lays out the schedule in advance. Early payments on a long loan tend to cover more interest, while later ones apply more heavily to the principal.
Source: Consumer Financial Protection Bureau, Mortgage Key Terms
- Origination fee
An origination fee is a charge a lender makes to the borrower for making the loan. It can cover reviewing the application, assessing creditworthiness, and funding the loan. For U.S. mortgages the fee must be disclosed up front on the Loan Estimate, and it generally cannot rise by closing. Because it is a cost outside the interest rate, APR reflects it.
- Loan term
A loan term is the length of time over which a loan is to be repaid, usually stated in months or years. The same borrowed amount can be spread across a shorter or longer term. A longer term lowers each payment but generally increases the total interest paid, which is why the term is listed among a loan’s main terms.
Source: Consumer Financial Protection Bureau, Auto loan answers
Every term on Lever is in the money glossary.
About this module
What a loan is made of is part of Credit & debt, one of 15 subjects in Lever. It’s a short run of 7 lessons, about 18 minutes in all, so you can finish it in one sitting.
Every lesson takes one idea at a time. You read it with the math worked out step by step, answer a question that puts it to use, then see why the right answer is right and why the others aren’t.
It’s for anyone who was never taught this, and you don’t need to know anything first. Every lesson is free. Lever works out what you already know, so you can start here or let your path bring you to it.
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It’s part of Credit & debt. Lever will bring it to you when you’re ready, or you can go straight there.