Loan Principal vs Interest Breakdown Calculator
Interest charges can constitute a surprisingly large percentage of your monthly loan payments. For a particular loan payment, this calculator will help you figure out how much you’re paying toward the principal and what you’re paying in interest.
First enter a loan’s original principal amount, as well as the interest rate, the original number of payments, and the monthly payment amount. Then indicate a payment number that you would like broken down. Press CALCULATE and you’ll see dollar amounts for the interest and principal portions of the payment number you specified.
Understanding the Breakdown of Loan Payments
Loans are an essential part of most people's financial lives. Student loans, car loans, business loans, and mortgages are just a few of the types of loan a person may need to apply for during a lifetime. More goes into a loan payment than just paying back the borrowed money with some interest. Depending on the type of loan and the source from which the loan is obtained, you may end up paying several other things as well in your monthly payment. These factors are important to consider when looking for a loan since the same arrangement won't work for everyone.
The principal of a loan is the amount of money you borrowed. The majority of a loan payment is made to pay off the principal amount. Principal is most commonly paid off in fixed monthly installments, and you're obligated to make the same payment each month. However, you can pay more than your monthly bill if you want to get your loan paid off faster. Paying extra one month does not reduce the amount you will owe the next month, however, nor will it minimize any future payment amounts.
To borrow money, you have to pay interest when you pay back the principal. The bank or private loan company will calculate your interest rate. The percentage of interest you'll be paying changes as you pay back the principal. You'll owe more interest in the beginning because the principal is larger.
Though paying more than your monthly bill does not affect the amount of principal you have to pay back, it does have an impact on the amount of interest you pay, since the less time you spend owing money, the less time the interest has to compound. It also compounds on a smaller amount with each principal payment you make. Though the amount of interest you pay technically changes with each payment, banks and private loan companies usually amortize the payments, which means they calculate how much interest you'll owe over the term of your loan and come up with a steady monthly payment.
Loans do not always involve taxes. If you require a loan and aren't purchasing or renting something (like property) which carries a tax, then you don't need to worry about taxes associated with your loan. Loans themselves are not taxable by the government because they aren't income and they aren't gifts. However, if you're getting a mortgage, you'll have real estate taxes to pay. Also keep in mind that the IRS keeps an eye on loan payments, because if a loan is forgiven or if you simply stop paying for it, they may consider the money a gift or income instead of as a loan, at which point you will have to pay taxes on it.
Loan insurance isn't a necessity, but many borrowers choose to get insurance as a safety net. These insurance plans make loan payments under certain circumstances if the borrower is unable to make the payment. Circumstances depend on what kind of insurance, but some options involve coverage for death, disability, or involuntary unemployment.
Escrow is how things like taxes and insurance get built into your overall monthly loan payment. Some of the most typical types of loans, like mortgages, involve escrow payments. The purpose of an escrow payment is to collect money for taxes and insurance into an escrow account. The service through which you got the loan (like a bank or private loan company) then uses the escrow account to pay the taxes and insurance. If you don't have an escrow payment, then you are responsible for those taxes and insurance payments yourself. Once your loan has been paid off, any remaining balance in the escrow account returns to you.
Some loans, like student loans and mortgages, come with loan fees attached. These origination fees are charged for setting up the loan. In student loan cases, for example, fees are usually deducted from the principal money borrowed, which lowers the total amount of money received, though the borrower is still required to pay back the entire amount of the loan, including the part deducted for the fees.
Knowing how loan payments work and what you're paying for when you make them is essential to maintaining good credit and financial stability. Before you get a loan, talk with your lender and find out exactly what goes into your payment since it's more complicated than just low interest rates and the timeline of the loan repayment.