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Principal vs Interest: What's the Difference?

When you take out a loan, you're borrowing money from a lender and agreeing to pay it back over time. Your payments are typically made up of two parts: principal and interest. The principal is the amount of money you borrowed, while the interest is the cost of borrowing the money.

How Principal and Interest Are Calculated

Your loan's interest rate will determine how much interest you'll pay over the life of the loan. The higher your interest rate, the more you'll pay in interest. The loan's term (the number of years you have to repay the loan) will also affect the amount of interest you pay.

How Principal Is Calculated

The principal is the amount of money you borrowed from the lender. For example, if you take out a $100,000 loan with a 5% interest rate and a 30-year term, your monthly payments will be $536.82, and you'll pay a total of $192,614.76 in interest over the life of the loan.

How Interest Is Calculated

Interest is the cost of borrowing money, and it's calculated as a percentage of the principal. The interest rate is the percentage of the loan that you'll pay in interest, and it can be fixed or variable.

The Difference Between Principal and Interest

The main difference between principal and interest is that principal is the amount of money you borrowed, while interest is the cost of borrowing the money. Your interest rate will determine how much interest you pay over the life of the loan. The higher your interest rate, the more you'll pay in interest.

How Principal Affects Your Loan

The principal is the amount of money you borrowed from the lender, and it's the amount of money you'll need to repay. Your monthly payments will be based on the principal, and you'll need to make sure you have enough money to cover the entire amount of the loan.

How Interest Affects Your Loan

Interest is the cost of borrowing money, and it's calculated as a percentage of the principal. The higher your interest rate, the more you'll pay in interest. The interest rate can be fixed or variable, and it will affect your monthly payments.

The Bottom Line

When you're taking out a loan, it's important to understand the difference between principal and interest. The principal is the amount of money you borrowed, while the interest is the cost of borrowing the money. Your interest rate will determine how much interest you pay over the life of the loan. The higher your interest rate, the more you'll pay in interest.

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