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How loan amortization works
Each monthly payment splits between interest (calculated on the current balance) and principal. Early in the loan, interest dominates — on a 30-year mortgage, the first five years can be 80% interest. Extra principal payments chop balance off the back end of the loan, killing interest that would otherwise compound.
The real cost of a loan
Look at total interest as a percentage of principal. Under 20% is cheap debt — short term or low rate. 20–50% is normal for mortgages and auto loans. Above 50% means you’re paying the bank as much as the item itself over the life of the loan; typically personal loans, long-term auto financing, or high-rate credit card debt.
Why extra payments work so hard
Every dollar of extra principal avoids every future month of interest on that dollar. A $100 extra monthly payment on a 30-year mortgage at 7% can save 5+ years and tens of thousands in interest. This calculator shows exactly how many months you skip.
When paying down a loan beats investing
Simple rule: if the loan rate is higher than your expected after-tax investment return, pay down the loan. Credit cards at 22% beat any investment. Student loans at 4% usually lose to a diversified portfolio. Mortgages at 7% are a wash — depends on your tax situation and risk tolerance.