Small principle/high interest amortization system

[ilikemoney]

You know the system for regular repayments where at the beginning large chunk goes to lender interest and small chunk goes to paying off your principle, what types of loans does this apply to?

I know it applies to mortgages. What about car loans? Student loans too? What loan types does it apply to and what it doesn’t?

[jpg7n16]

It's not a specific type of loan or a loan elimination system - it's a principle of how loans work.

On any loan, the earlier payments will include more interest and less principal than later payments (assuming the loan balance isn't being increased over that timeframe). Interest is charged on the balance remaining, and as that balanced owed goes down over time, so does the interest charged.

It is normally referenced on any loan with a fixed payment amount over a set period of time (yes that includes mortgages, car loans, and student loans)

[disneysteve]

jpg, you aren't entirely correct. There is such a thing as a simple interest loan, sometimes seen on auto loans. The total interest cost is added to the amout borrowed and that number is divided evenly into the number of monthly payments. Paying extra won't reduce the interest costs because that number is already figured into the balance.

I'm not sure how common this method is but it does exist.

[jpg7n16]

Fair enough. I hadn't heard of 'simple interest' loans, but I did find an example of one, and why you should never get one.

Simple Interest Car Loan

Over the same timeframe, with the same interest rate, on the same loan balance - the 'simple interest' loan was $351.72/month and the fully amortizing loan was only $309.72/month. A savings of $42/month for 4 years ($2,016). Each payment is 12% lower with an amortizing loan.

Moral of the story: never get a simple interest loan.


I suppose you could also say that an 'interest only' loan also doesn't fit the pattern exactly. But the first payments are 100% interest, and the last is 100% principal. So eventually, the percentage of principal goes higher - just not until the last payment.