Personal Finance

Loans

Money Management

# Why is more interest charged at the beginning of a loan?

###### Wiki User

###### April 26, 2005 10:14PM

The interest is based on the amount owed, therefore as payments are made the balance drops as does the interest amount (not the rate). So the interest is higher at the begining, because more money is owed at the begining.

## Related Questions

###### Asked in Personal Finance, Loans, Money Management

### Why is more interest paid at the beginning of a loan period than at the end of the loan period?

Charging interest is the method by which a lender profits from
loaning money to a borrower. The lender will set the terms of any
loan to their advantage. They obviously want to get paid first and
get paid the most. The balance of a loan is typically higher at the
beginning of a loan, and interest will be charged on the balance.
So as a person makes payments on the loan typically he/she will be
making a payment consisting of part interest and part principal. As
the person pays down the loan the interest that is calculated at
the compounding period will be less because the principal amount
has been reduced. For example, a person has a $1000 payment, at the
beginning of the loan the payment may be broken down as ($900
interest and $100 principal), on the last payment of the loan the
payment of $1000 may look like ($950 principal and $50
interest).

###### Asked in Credit and Debit Cards

### What is inerest is charged only on the balance remaining in your account?

It depends whether you're talking about savings or loans.
If you have money in a savings account, you ACCUMULATE interest
(therefore, you make more money).
If you took out a loan, you PAY BACK interest (therefore, pay
more money than you originally lent).
The actual amount of interest (as a percentage) that you will be
charged depends on many factors.
- What is the central bank's interest rate?
- What is your specific bank's interest rate? (Based on that of
the central bank)
- What is your credit rating? (Lower credit score means higher
interest)
- How long will it be until you pay back the loan? (Longer time
frame means higher interest)
- Etc.

###### Asked in Credit and Debit Cards, Home Equity and Refinancing

### Is interest computed differently on revolving credit vs non revolving credit?

Yes. Interest accrual methods will depend heavily on the
specific loan type. Different revolving accounts may be calculated
differently, as will different fixed loan types.
Most commonly, a non-revolving loan may be "simple interest"
where interest is calculated daily based on the principle loan
balance, or may be "amortized" where a set amount of interest is
charged each month based on calculations made when the loan was
granted. Lenders may also use a slightly different calculations due
to the days-in-year their system charges interest on (365/360
etc).
A revolving credit account interest rate may be compounded
(commonly used for credit cards) where you pay interest in the
total account balance daily (so you effectively pay interest daily
on interest you accrued the day before), simple interest (interest
charged daily on the principal loan balance), or one of several
other more obscure interest calculation methods.
There are some loan types, both fixed and variable that require
payments less than the amount required to satisfy interest due.
These "negative amortization" loans charge interest on unpaid
principal and interest while adding the unpaid interest to the loan
balance. These loans became notorious as a major factor in the
mortgage and housing market collapse that became widespread in
2007.

###### Asked in Auto Loans and Financing, Income Taxes, Tax Audits

### If you pay more than the amount due every month do you still get charged the same amount of interest?

NO, you should actually pay LESS interest over the period of the
loan. You will actually pay it off sooner.
If you are paying more then you need to specify to the dealer
that you would like all overpayments to go twards the princeple not
the interest which by lowering the princeple will automaticly lower
the interest.

###### Asked in Loans, Mortgages, Home Equity and Refinancing, Money Management

### How does your payment change between a 30 and 40 year mortgage?

A payment on a 40 year loan, if it is a fixed-rate loan, will be
smaller, provided all other factors like loan balance and interest
rate are the same. If you are talking about an adjustable rate
loan, well, your payment will vary on your interest rate more than
how long the loan term is. A 40 year loan will pay-down your loan
slower, meaning at 10 years, you'll owe more on a 40 year loan than
a 30 year loan. You may also pay more towards interest on a 40 year
loan.

###### Asked in Mathematical Finance

### What interest rate would you be charged if you have borrowed r100000?

The answer will depend on
who you borrowed it from (a loan shark could well charge more
than several hundred times what a reputable lender would
charge),
how long the loan was for,
what the loan was for,
what the expected return on your loan was,
your credit rating or how risky the lender considered
you,
what securities you could put up - in case you did default on
the loan,
what the inflation rate was - now and over the term of the
loan,
the "normal" loan size for the lender.

###### Asked in Mortgages

### Why do interest payments decrease each month and the principal payment increases?

Mortgages are typically "front-loaded." That means the interest
is paid more aggressively in the beginning of the life of the loan
than the principal. As the loan matures, less of your payment is
devoted to paying the interest on the loan and more is applied to
your principal balance.
It is important to mark extra payments as being toward the
principal, otherwise your mortgage servicer may apply any extra
payments as an additional monthly payment instead of reducing the
principal.

###### Asked in Loans

### How Paying Off Your Car Loan Early Can Benefit You?

Paying off a car loan early may be difficult, but it has
financial benefits:
Interest Savings- If you pay off your car loan early, you'll
save money by having a shorter time for interest to be charged on
the loan, plus a smaller balance while you're working on paying off
your loan.
Fewer Payments- Although it'll take some planning to be able to
pay more towards the loan now, you'll soon not have to worry about
making any payments at all once your loan is paid off.