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What is principal and interest?

interest rate animationSimply put, the principal is the amount of money you borrowed when you first took out your loan. The cost of borrowing money is the interest charged by the lender. Your loan payment is equal to the sum of the two components.

The principal amount, the loan term (i.e. 5, 10, 15, 20, 25, and 30-years), and the interest rate are used to calculate the payment. The unpaid principal balance is used to compute interest.

To further understand the relationship between principal and interest, use the interest and principal calculator. You can dramatically reduce the total interest paid to the lender by making a monthly overpayment.

How much money can you save by paying down the principal?


Principal and Interest: Frequently Asked Questions

Q. Can there be a difference between principle and interest?
A. The interest on a loan is always less than the principal.

Q. Is it possible to pay down the principal before the interest accrues?
A. Overpayments on most loans can be used to pay off the principle debt. Making additional principal payments decreases the loan's interest rate.

Q. Do extra payments go to the principal automatically?
A. Usually, extra payments are allocated to the principal. You should write on your check that the overpayment will be used to reduce your principal. Keep a copy of the canceled check or statement at all times. Banks and servicers are human, and they make mistakes.

Q. Is it true that paying the principal lowers the interest rate?
A. The amount of interest paid on the loan will decline as the principal balance decreases.

Q. Is it better to pay the interest or the principal?
A. Because interest is based on the principal balance, paying more on the principal lowers the amount of interest owed. Even a tiny monthly overpayment can save a lot of money in interest.

Q. What percentage of a mortgage is made up of principal?
A. The principal refers to the amount of money you borrowed when you first got your house loan.

Q. What if I make one extra mortgage payment every year?
A. Using the calculator above, a monthly payment of $955 is calculated for a $200,000 loan with a 4% interest rate. You will save $97,327 in interest by paying an extra $955 per month, and your mortgage will be paid off 19 years and 2 months sooner.

Q. What happens if I make a high mortgage principle payment?
A. Your monthly loan payment will remain the same if you make any overpayments on your mortgage. However, in the future, an overpayment will reduce the overall amount of interest owed, and the loan will be paid off sooner.

Q. Why is it that interest takes precedence over principle?
A. For the first half of the loan amortization, the interest portion of the payment is usually bigger than the principle portion of the payment. The principal will be more than the interest payment in the second half of the loan. Interest is paid first, according to the principal and interest formula.