Why does payment go to interest instead of just the balance?

Question

I just don't understand. What is this garbage about payments going to interest instead of the principle or just the balance? If I have a 100 dollar payment where 90 goes to interest and 10 to the balance, does that just mean that my loan has $90 of interest charges per month?

Answer 1

This is standard policy in the lending industry. As more payments are made, the percentage going to the principal will increase until the final payment which will be mostly principal and very little interest.

Answer 2

It is not garbage, it is arithmetic. Yes, if you run up credit card bills, the monthly interest could be as high as 3% per month in some countries. So, suppose you have 100 dollars outstanding, the interest will be 3 dollars each month. For 1000 dollars, it will be 30 dollars a month and for 3000 dollars, it will be 90 dollars a month. Just an example to illustrate some figures. So, if you paid 100 dollars and 90 of it was adjusted against interest, you should be having a pretty large debt and the remaining 10 dollars only is adjusted against the principal. So, the next month too, most of your 100 dollars will go towards the interest only.

Answer 3

Yes, when a loan is first made, it is almost entirely made up of interest charges.

howver with each payment, the principal balances goes down-- so the interest each month drops, and more of your payment goes to the principle.

The first half of a loan, things go slowly-- the last half, it snowballs very quickly until its almost entirely principle for the last year or so.

1 year ago my $250 payment was $150 interest, $100 principle. Now its $100 interest, $150 principle.

Answer 4

Depends on the how interest on the loan is calculated. In the instance of home mortgages, the fully amortized loan will have heavy interest payments near the beginning, and heavy principal payments near the end. Most loans will be loaded with interest in the front end. This ensures to the bank that they receive their profit for funding the loan. Unfortunately the "garbage" you refer to keeps banks profitable and able to lend more money as a result. Part of agreeing to a loan is agreeing that the bank will make a substantial profit. After all, they did lend you money for something you otherwise would not be able to afford.

Answer 5

yes it does. your creditors wish you to pay the maximum amount of the loan which involves paying the interest first so that the remaining prinicipal will continue to generate the full amount of interest for them. my student loan payment for example is $101 of which 65 goes to prinicipal and 36 to interest. So in effect, yes I am paying 36 dollars a month for remainder of the prinicipal on my loan. Thats how banks make money.

Answer 6

That is why they are so willing to lend you money - - - - -Banks make big money off their loans! In America, it's all about the dollar!