Principal and Interest (Overview)

– Hi, this is Trevor and
today we’re gonna talk about Principal and Interest
Application in Payments. We’re gonna take a look at
how principle and interest is applied in the amortization of a loan as payments are made over time. Amortization tables and
now of course calculators and computers give us the exact amount of how much a payment needs
to be to cover the interest and to pay the loan off at a steady rate so that the loan is fully paid of to zero on the very last payment. Each payment contains both
principle and the interest that has accrued over that period. Let’s take a look at an example. Let’s say we have a $100,000 loan at 6% amortized over 30 years. Our payment amount is going to be 599.55 each month. 599 is our payment amount all the way to the life of the loan. Contained within that
$599 is both the interest that accrued that month and
also the amount of principle it’s going to take to pay down the loan at the steady rate that we’ve determined. Let’s take a look at how
that payment is broken down with each payment. With the first payment, when our balance on the loan is 100,000. 6% interest per year equals
half a percent per month. So each month, we are paying
one half percent interest on the current balance. So on the very first payment that half percent interest is $500. Which means that the
remainder of the payment, 99.55 goes to our principle. Since $99.55 was paid
toward the principle, then when the second payment
is due the new balance on the loan is $99,900.45. So with the second payment,
1/2% or 6% annually, 1/2% per month is due on the
new balance of $99,900.45. Which means that half a percent
of that would be $499.50. As we can see, the amount of
interest with each payment that’s being charged
on loan is going down. And since the remainder of the payment is applied to principle, then on the second payment, $100.05 is applied to principle. Thereby reducing the unpaid
principle balance again. So that on the third payment, our new balance is $99,800.40. Half a percent on 99,800.40 is $499 even. Which means that $100.54 would
be paid towards principle and so on and so forth. On our last payment or 360th payment, our balance is 596.57 of that $2.98 are interest and then 596.57 is our final principle payment that pays the loan down to zero. This has been a quick overview
of how principle and interest are applied in the
amortization of payments. Thank you for watching.

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