I just think each payment, if not late, with no outstanding late fees or penalties, should only have 8% of it going to interest and 92% going to principal. What do I have to do, make Daily Payments to only pay 8% interest? If so, then when I save at 5%, shouldn't I be getting more than 5% APR, or do they add it, Daily, like making Daily payments to your savings account, so they pay you the absolute Minimum interest?
The answer Colorado gave is correct - except 1 step was omitted. The # of days in the cycle.
Simplier put is as follows:
x apr (enter as 8.00%)
divided by 360 or 365 (either is accepted by the feds)
=s the daily interest cost
multiply this daily amount by the # of days since you last paid
this =s the interest due
payment less interest due =s the principal amount paid
Hence, if you pay more frequently than once every 30 days, the balance generates less interest. And yes, every amount over the regular payment amount goes toward the principal.
The reason it would seem that you are paying more interest up front is because you are - you have the larger portion of their money at the first part of your loan. Eventually as you owe less, it generates less interest.
Same formula as above will also calculate your interest due on charge cards.
In a vast majority of loans, the early payments go mostly towards interest with a small amount to principal. As you make additional payments the amount you pay to interest declines slightly each month and the amount you pay towards principal increases slightly each month. At the end of the term the balance owed should be exactly $0.00. You should ask your lender for an Amortization schedule that will layout the loan payments for you. You can even create on in Excel or find one on the internet.
Here is an example:
$5,000 loan, fixed 8% annual rate and a 10 year term
The monthly payment is $60.66 (calculated)
The first $60.66 payment you make consists of $33.33 in interest and $27.33 in principal. The interest is calculated by taking the loan balance of $5000 and multiplying by the monthly interest factor (.006667, which is .08/12). So $5000 X .006667 = 33.33 in interest. $60.66 payment less 33.33 in interest = 27.33 against principal.
For the second payment, the loan balance is now $4972.67 ($5000 less 27.33 from the 1st payment) and the interest is $33.15 (4972.67 X .00667), which leaves $27.51 as a principal payment. Notice that the interest amount is smaller and the principal amount is bigger.
This goes on for 120 months. At the end of 10 years you will have paid $7,279.66. $5,000.00 for the loan and $2,279.66 in interest.
You should have the option of making a larger payment each month. The amount over $60.66 will all be applied to principal and will result in fewer monthly payments and less in total interest payments.
Yep that's how long term loans work. The longer you are in the loan the more goes to principal because there is less Principal left collectiong interest. If you think that is bad you should see how it is when you buy a house.
Although I am not sure what your amortization schedule looks like, it sounds like you should request one.
Usually the 8% is charged on the principal balance on an annual basis. .67% per month if it is monthly interest.
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