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Why is more interest paid at the beginning of a loan than the end?
Navajota
I presume that the person asking the question is referring to a loan with so called "levelized payments". Most mortgages have levelized payments which means that during the duration of the loan each month and each year you pay the same amount to your lender. Each payment to the lender consists of interest and principal payments. Via the principal payments you repay the lender the amount you borrowed. Interest is the compensation you pay for borrowing the money. This is the profit for the lender. Every time you borrow money you only pay interest on the amount that you owe the lender. When you first borrow money and have not paid back any principal, you have to pay interest over the entire amount you borrowed. After you have made several payments you have repaid part of what you have borrowed from the lender. The amount outstanding is lower than in the beginning. Hence the amount of interest you have to pay is less than in the beginning. Let's assume the principal is $100. In the beginning, the interest is calculated on the entire principal that is outstanding i.e., $100. When you pay $20 as installment towards repayment of the loan, $6 (say) goes towards interest component and the balance $14 towards principal repayment. Hence the principal outstanding is now $100- $14 = $86. The next installment is also $20. The interest component is 6% of $86= $5.16 (as against $6 for the previous installment). The principal component = $14.84. The outstanding principal now is $86 - $14.84 = $71.16 and so on. You can see that the interest component keeps decreasing while the principal component keeps increasing with time. The key is that the interest is calculated on the outstanding principal and hence varies with time.
Wiki User
∙ 2007-12-05 21:57:54
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What is a discounted bank loan?
it is when interest is paid in advance at the beginning of the loan term on a discount loan
Why is more interest paid in the beginning of a loan than the end?
There is more princple left on the loan for the interest to be calculated off. If the bank will let you. As to make payments on the princle. This will lower the amount of interst that is calculated in the future.
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).
Why is more interest paid at the beginning of a loan period than that at the end?
more interest is paid at first to secure the loan. they want to get their part of the money back as quickly as possible. what happens to the value of a new car the instant you drive it off the lot? Financial institutions are in it to make money not lose
Why is more interest paid at the beginning of a loan period that at the end?
Because your balance is high at the begging of the loan so then the balance goes down as you pay money so it comes to be less
What is the definition of an amortized loan?
An amortized loan is just a basic loan where the principal and interest are paid on a monthly basis. Usually, the majority of the interest is paid first, then the principal.
How can you show that more interest is paid at the beginning of a loan period than at the end?
Interest is computed on the remaining balance monthly..If you have a credit card balance and pay exactly every 30 days, you will see that the interest charged is reduced by a small amount every month.
How much interest will be paid in 1 year for a loan of at simple interest?
missing word
What is an advantage of a shorter-term loan?
less interest paid...
What is explicit interest?
Explicit interest is the amount of money that is paid on a loan. This means that it is a fixed amount of interest.
How much is the interest rate on 14289.00 at 3.5 percent for five years how much will you pay in interest on a loan?
The interest rate is given in the question. It is 3.5%.The amount of interest paid on the loan depends on how much of the loan (if any) is paid back during the period of the loan. If there are no interim payments, the total interest at the end of 5 years is 2681.85 approx.
What are auto loan rates used for?
Auto loan rates show the person receiving the loan the amount of interest a receiver will pay for the loan. A high rate will mean that it will take longer to pay off due to more money needing to be paid for the interest.
