Let's take a sample loan offer:
Loan Amount |
15000 |
Interest Rate (Annual) |
12.90% |
Interest Rate (Monthly) |
1.075% |
Number of payments |
18 |
Monthly Payments |
$921.01 |
Now, let's take the first 4 monthly payments:
Month |
Remaining Loan |
Interest |
Principal |
New Balance |
1 |
$15,000.00 |
$161.25 |
$759.76 |
$14,240.24 |
2 |
$14,240.24 |
$153.08 |
$767.93 |
$13,472.31 |
3 |
$13,472.31 |
$144.83 |
$776.19 |
$12,696.12 |
4 |
$12,696.12 |
$136.48 |
$784.53 |
$11,911.59 |
Month 1 :
Starting balance is $15,000 and the monthly interest rate is 1.08% (based on Annual 12.90% APR).
The interest on this outstanding balance of $15,000*(1.075/100)= $161.25. Of the $921.01 payment, $161.25 goes towards interest and the remaining ($759.76) goes towards the principal.
Month 2:
The new outstanding balance is $14,240.24 (which is $759.76 less than the previous balance as this amount went towards principal).
The interest on this new outstanding balance of $14,240.24*(1.075/100)= $153.08. Of the $921.01 payment, $153.08 goes towards interest and the remaining ($767.93) goes towards the principal.
Month 3:
The new outstanding balance is $13,472.31 (which is $767.93 less than the previous balance as this amount went towards principal).
The interest on this new outstanding balance of $13,472.31*(1.075/100)= $144.83. Of the $921.01 payment, $144.83 goes towards interest and the remaining ($776.19) goes towards the principal.
This pattern continues until you have paid off the loan.
If you make a payment higher than your monthly installment amount, it will go towards the principal & accrued interest up to that point. This reduces the principal and saves you future interest.
The interest is accrued daily on the outstanding balance. If the principal amount reduces due to extra payments, the total interest you pay also goes down. If you pay off your loan in 1 day, you will only pay 1 day of interest.*
*Please note that interest is calculated daily and not every month.
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