If I borrow 100k at 5% interest, and to be paid back in 5 years, why is it not that case that I just pay 21k per year and would have paid 105k after 5 years? I heard that if I pay back a little extra every year, it will help to go pay off the interest first, what does that mean? If I owe a set amount of money on fixed interest, how can the total amount change?
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The interest rate is the annual interest paid on the remaining balance. So you’d pay $5k in the first year, say $4k the second year (5% of the reduced principal), and lesser amounts of interest each subsequent year. The total of all the interest and principal is determined and them amortized to even the payment each month, with the interest vs. principal shifting over time.
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