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I talk a lot about debt payments on here
Let& #39;s dig a little deeper
WHY does it help to pay even a bit more each month to your debt payments?
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Let& #39;s dig a little deeper
WHY does it help to pay even a bit more each month to your debt payments?
When you make a payment, a portion of the payment pays off interest on your loan
The interest, if ignored, can compound much like your beloved dividend portfolio and make the lender more and more money.
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The interest, if ignored, can compound much like your beloved dividend portfolio and make the lender more and more money.
While paying the interest on your loan is important to stifle the compound nature of your debt, it is more important for your payment to exceed the amount of interest and cut into the principle part of the loan.
This is the key
This is the key
What is the principle?
The principle is the value of your loan.
This is the value that the interest rate multiplies by to get your monthly/annual interest payment.
The principle is the value of your loan.
This is the value that the interest rate multiplies by to get your monthly/annual interest payment.
For example,
If you have a
- $10,000 loan
- with a 5% interest rate
The principle would be the $10,000
The annual interest would be $500 or $41.66 monthly
If you have a
- $10,000 loan
- with a 5% interest rate
The principle would be the $10,000
The annual interest would be $500 or $41.66 monthly
If you JUST pay off all of the interest each month
your loan will not grow (this is not true all the time)
However, if this is your strategy, you will never make any progress on the loan because your payment never cuts into the PRINCIPLE
This is like treading water
your loan will not grow (this is not true all the time)
However, if this is your strategy, you will never make any progress on the loan because your payment never cuts into the PRINCIPLE
This is like treading water
Let& #39;s say instead you paid $250 a month towards this debt
- $41.66 would pay the interest
- $208.34 would hit the principle
The principle would decrease from $10,000 to $9,791.66
- $41.66 would pay the interest
- $208.34 would hit the principle
The principle would decrease from $10,000 to $9,791.66
It is imperative to realize that only PART of your $250 makes progress on your loan
The $41.66 is just to keep you treading water
The $41.66 is just to keep you treading water
This is why extra payments are crucial to paying down debt
The extra money cuts into the principle of the loan
*Not financial advice, only sharing my experience with debt. Seek Financial counseling if needed*
The extra money cuts into the principle of the loan
*Not financial advice, only sharing my experience with debt. Seek Financial counseling if needed*
