From the course: Finance and Accounting Tips

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Loan payments: Understand interest and principal

Loan payments: Understand interest and principal

From the course: Finance and Accounting Tips

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Loan payments: Understand interest and principal

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- Let's say you buy a house, a car, furniture or you have a student loan, or are making payments on some other sort of credit arrangement. When you make a payment, how much of each payment actually goes to reduce your loan balance and how much of the payment is interest? It's relatively straightforward to compute the amount of each payment that's interest, and the amount that's applied to reduce the principal. Now, you're going to need a calculator or a spreadsheet to do it, but it's not that difficult. All you need to know is your current outstanding balance, the length of time since your last payment, and the interest rate at which you borrowed the money. Now, your computations may differ from your lenders because of such things as the day you sent your payment isn't the day they received your payment. There may be slight differences, but at least you'll get a pretty close approximation. Okay, let's assume you buy a car and borrow $20,000 to be repaid over five years or 60 months at…

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