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
With your example numbers, the interest charged to the loan the first month is about $91.
That means the bank puts $91 in their pocket and takes $209 off your loan balance.
The second month, because your $10k is now $209 less, the interest is only $89.75 which means $210.25 comes off the balance.
And so on and so forth, the balance gets lower, the interest gets lower, the principal loan balance is paid off.
If you make extra repayment, say $100. That entire $100 comes off the loan balance. Now the second month interest is $88.83. That’s a small difference at the start, but it gets magnified over the life of the loan.
There’s a calculator that can show you the difference here: https://www.gatewaybank.com.au/about-us/calculators/extra-repayment-calculator/
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