Quote:
Originally Posted by Hugh R
In the beginning of loans, you pay mostly interest and at the end mostly principal.
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A common misperception. True, it looks staggered, but your payment, whether it's your first or your last, breaks down like this:
1. taxes, if applicable (i.e. a leased vehicle)
2. the interest on whatever your outstanding principal balance is
3. remainder goes to principal
So for example, say we take a $5,000 loan at 5% amortized over 5 years. Payments will be $94.36 per month. The first payment breaks down into $73.53 principal and $20.83 interest. If you take the opening balance of $5000, 5% interest on the year = $250, divide by 12 (for one month's worth of interest) = $20.83.
You always must pay the interest owing each month. Whatever's left over from your total payment amount is applied to principal. Therefore your first payment's interest is exactly the same as your last payment, proportionate to your balance.
My point is that it's not some weird algorithmic calculation cooked up by financial institutions to make as much profit up front as possible. It's simply the cost of borrowing, and if the total payment amount is fixed, then the interest in the early portion of a loan eats up all the payment, because the outstanding balance is so high.