Question

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Answer 1

Answer:

Given

Explanation:

What is loan principal?

Loan principal is the amount of debt you owe, while interest is what the lender charges you to borrow the money. Interest is usually a percentage of the loan’s principal balance.

Either your loan amortization schedule or your monthly loan statement will show you a breakdown of your principal balance, how much of each payment will go toward principal, and how much will go toward interest.

When you make loan payments, you’re making interest payments first; the the remainder goes toward the principal. The next month, the interest charge is based on the outstanding principal balance. If it’s a big one (like a mortgage loan or student loans) the interest might be front-loaded so your payments are 90% interest, 10% principal, and then toward the end of the term, your payments are 10% interest and 90% principal.

To illustrate, let’s say Hannah’s Hand-Made Hammocks borrows $10,000 at a 6% fixed interest rate in July. Hannah will repay the loan in monthly installments of $193 over a five-year term. Here’s a look at how Hannah’s loan principal would go down over the first couple months of the loan.

Month Payment Amount Interest Paid Principal Paid Principal Balance

July - - - $10,000

August $193 $50 $143 $9,857

September $193 $49 $144 $9,713

As you can see from the illustration, each month, the 6% interest rate applies only to the outstanding principal. As Hannah continues making payments and paying down the original loan amount, more of the payment goes toward principal each month. The lower your principal balance, the less interest you’ll be charged.

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