Say there’s a loan for $10,000. The interest rate is 11%. Monthly payment is $300.
How can you keep interest at bay, and not pay thousands in interest by the end of it all?
Is there a formula to figure out how much *extra* to pay per month, in order to… cancel out? the interest?
Is this even possible? Is this even how interest works?
Honestly, I don’t get the concept at all. Explain it to me like I’m five.
In: Economics
**Simple, eli5 math would work like this:**
The interest payment does not go to principle, so you’re going to pay $300 a month *just to keep the loan going forever.*
To pay down the *loan*, you need to pay principle. How much you should pay depends on a) what you can afford, and b) how quickly you want to pay it down.
To figure out how to calculate that, it’s simple. Take the $10K and divide by how much extra you can pay, then add the $300 interest on top of that. You will pay down the loan by the amount you’re paying extra every month.
Using your example: Say you want to pay off the loan in a year:
**$10K / 12 months = $834 per month.**
**$834 (principle) + $300 (interest) = $1134.**
**So, if you pay $1134 per month, you will pay off the $10K debt in 12 months.**
This makes a bunch of assumptions (like you don’t add to the debt) and I’m hand-waving over interest rates. But that’s the general idea.
Make sense?
Latest Answers