The contents provided on this page are for informational purposes and do not constitute financial advice. They were not sponsored in any way.
Taking out a loan can be a smart way to achieve big financial goals, like buying a home, starting a business, or consolidating debt. But understanding how loan repayments work is key to staying on top of your finances and avoiding unnecessary stress.
In this article, we’ll break down how your loan repayments are allocated and share practical tips to help you stay in control and avoid missing payments.
How do loan repayments work?
When you repay a loan, your payment is usually split into two main parts: principal and interest.
- Principal: This is the original amount you borrowed. A portion of each repayment goes towards reducing the principal, which decreases your overall loan balance.
- Interest: This is the cost of borrowing money, usually charged by the banks or lender. Each repayment also covers the interest, which is calculated based on your loan balance and interest rate.
In most cases, during the early stages of your loan a larger portion of your payment usually goes towards paying off your interest charges. As you pay down the principal, more of your money starts to chip away at the loan balance. This is particularly true for amortising loans (where you pay off your outstanding amount in regular payments), like home or car loans.
Where does your money go?
Understanding where each part of your payment goes can help you better manage your loan and financial planning. Here’s a breakdown of how your loan repayment is typically allocated:
- Interest: Each month, your lender calculates how much interest you owe based on your remaining loan balance. Part of your repayment goes towards covering that interest.
- Reducing the Principal: After the interest is taken care of, the rest of your payment goes towards reducing the principal. The more you reduce the principal, the less interest you’ll pay in the future—this is why making extra payments can help you save you over the long term.
- Fees (If Applicable): Some loans come with additional costs, like account-keeping or servicing fees. These are usually deducted first, so it’s a good idea to understand what fees are included in your loan repayments.
This could be one way your payment is allocated, however different banks and lenders may have different ways of allocating the money for your repayments. Speak to your financial provider or lender and check the terms of your loan for accurate information specific to your circumstances.
Tips to stay on track with your repayments
Staying on top of your repayments can not only help you to maintain good financial health, such as a healthy credit score and avoiding late fees; it can also help with your general well-being and managing stress. Here are some simple tips to help you stay on track with your repayments
- Set up automatic payments: One of the easiest ways to avoid missing a payment is by setting up automatic payments. You can arrange for the amount to be debited from your account on the due date, so you don’t have to worry about it.
- Align payments with your payday: If you can, sync your loan repayments with your payday. That way, the money goes out as soon as you get paid, and you’re less likely to spend it on something else. Some lenders even offer weekly or fortnightly repayments, which can help spread out the cost. For example, Beforepay offers flexible repayment options like fortnightly or weekly payments that align with your pay cycle, making it easier to stay on top of your repayments.
- Create a loan repayment budget: Make sure your loan repayments are part of your budget so you always know what’s due and when. Prioritising your repayments can help you avoid any surprises.
- Set payment reminders: Even with automatic payments, it’s a good idea to set reminders. This gives you a heads-up before the due date, so you can double-check that your account balance is ready for the payment.
- Make extra payments when possible: Got a little extra cash? Consider making an additional repayment. Even small amounts can reduce the principal and save you interest over time.
- Stay in touch with your lender: If you’re ever worried about missing a payment, reach out to your lender early. Many lenders offer hardship options or flexible repayment plans, so don’t wait until it’s too late to ask for help.
The benefits of staying on time with your repayments
Consistently making on-time repayments can help you in a number of ways:
- Improves your credit score: Your payment history is usually taken into consideration when calculating your credit score, meaning consistent on-time repayments might help improve your credit score.
- Avoids late fees: Missing a payment often comes with late fees, which only add to your overall loan cost. Staying on track means you can avoid these extra costs.
- Reduces stress: Knowing your loan repayments are sorted can give you peace of mind, so you can focus on your other financial goals without added worry.
- Improve trustworthiness: A strong repayment history can help demonstrate reliability which will help banks decide your eligibility.
Understanding how loan repayments work can help you take control of your financial journey. When you know where your money is going—whether it’s toward interest, principal, or fees—you can better manage your loan and make smarter financial decisions. By setting up automatic payments, budgeting for your repayments, and making extra payments when you can, you’ll stay on track, avoid extra costs, and build a stronger financial future.
Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.