When you make a payment each month, your payment is applied to different parts of your loan: principal, interest, and fees.
The principal is the balance of the loan. The amount that goes to principal each monthly payment increases as you continue to pay down the principal. This is why it’s important to make on-time payments. If you miss a payment, interest will continue to accrue on the larger balance and your loan will end up costing more. Note that your principal balance isn’t the payoff amount of your loan as it doesn’t include interest or fees.
The principal is the balance of the loan. The amount that goes to principal each monthly payment increases as you continue to pay down the principal. This is why it’s important to make on-time payments. If you miss a payment, interest will continue to accrue on the larger balance and your loan will end up costing more. Note that your principal balance isn’t the payoff amount of your loan as it doesn’t include interest or fees.
Let's break it down!
Say you have a $10,000 loan with an interest rate of 5.25% and a 10-year term. Your monthly payment is $107.29. When you make your first payment, it goes to fees first, if you have any, interest second, and to your principal last. About 60% of your first payment goes to principal and the rest to interest. This means that your very first payment pays down $64.14 of your principal so your remaining unpaid principal is now $9,935.86. The graph below shows this in action over the life of the loan.
