Interest vs Principal Payment Calculator

This calculator will compute a loan's monthly interest-only payment along with its principal and interest payment.

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Are Interest-Only Payments Best?

Loans are sought to cover big-ticket purchases; like homes and cars, as well as unexpected expenses not accounted for in standard household budgets. Expensive purchases would not be possible for most consumers without assistance from creditors willing to advance financing in return for extra payments added to the original loan amounts (interest).

As loans originate, borrowers agree to repayment terms and interest rates governing their accounts.  Going forward, as funds become due, repayment addresses two specific categories of debt:  Interest and principal.

Principal Balance and Amortization

At the onset of most major borrowing periods, creditors outline specific repayment schedules that apply to each loan.  Terms and conditions outlining repayment include interest rates, fees and charges, and the number of payments required to satisfy the loan.  Principal represents the total original amount borrowed, free of any interest charges.

To keep payments even over time, as borrowers repay long-term loans, the principal balance is amortized over the course of every loan. Breaking payments up into chunks paired with interest reduces risk for lenders who are paid back with regularity, and ensures affordability for borrowers who budget for steady repayment.  Mortgages are typically amortized, though there are products available which only charge interest during the early loan period, followed by large balloon payments at the end.

Amortized mortgages carry consistent monthly payment amounts, but the way interest is applied over each loan's life is different.  Early payments, made during the first several years of a full-term mortgage, contain heavily weighted interest payments, with very little going toward the principal.  As repayment continues, and loan satisfaction turns the corner, the ratio changes, reflecting more principal payments.  Loans are fully satisfied when principal balances are entirely erased.

Interest Payments Add Up

In addition to principal, borrowers accept responsibility for interest payments. Loans are each structured differently, but interest payments almost always relate to the amount owed and the repayment schedule.  In general, prevailing rates respond to outside economic conditions, so they vary according to when they are issued and for what purposes.

APR, annual percentage rate, expresses the total rate at which interest is charged over the course of a year.  The figure is used to determine how interest is charged during each billing period.  In most cases, the APR is divided by the number of days in the year, to arrive at a daily periodic rate.  After credit grace periods have expired or other criteria met, The DPR is applied to outstanding loan balances.  In effect, loans administered in this fashion are compounding daily, so that interest is paid on interest.

Pay Ahead to Save

In the case of installment credit products, like mortgages and other term loans, paying ahead does not carry penalties.  In fact, when additional payments are made, beyond monthly compulsory amounts, the long-term savings adds up.  As required payments are applied to your debt, they are split between interest obligations and principal reductions.  Once accounted for, your monthly interest responsibility is fully satisfied.  As a result, extra payments contributed beyond monthly minimums are applied directly to your principal balance, trimming it without reductions for interest.