Saw a meme with a guy paying back a $32,720 loan with a 30% interest rate and people in the comments said he’s gonna nearly 100 grand, or an extra 37k. How does interest actually work cause I’d assume the 30% meant 30% of the 32 grand?
In: Economics
They will pay 30% of the remainder of the balance per year.
It really depends on the payments. If they’re paying $1000/month they will pay significantly less interest than if they are paying $200/month. The shorter the loan, the higher the payment, the less interest paid. Vice versa for longer length loans. If they paid off the entire loan immediately, they would owe little in interest.
Usually for home and auto loans, the loan is amortized. The principal and interest are calculated over a set period of time, then it gets divided by the time period in months to determine the monthly payment.
For credit cards, the interest is calculated daily, then multiplied by the number of days in the month to get a monthly payment.
Paying more than the monthly payment will greatly reduce the amount of interest owed over time. These are called principal payments. For home and auto loans, you usually need to specify you want to pay straight to the principal (not always, depends on the lender). For lines of credit, anything over the monthly payment will go to principal.
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