Payments are applied first towards unpaid late fees, then towards accrued interest, and the remaining amount is applied to the principal balance. The first payments on the loan will be majority interest repayment and, over the life of the loan principal decreases, the portion of the payment that goes to principal increases.
Interest accrues on the principal only, not on interest.
If the borrower has a 12% annual interest rate, their monthly interest rate is 1%. (1/12th of the annual interest rate).
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