A loan payment settles the interest bill first and reduces the amount owed with the rest. Next month’s interest is based on the smaller balance. A schedule keeps those two pieces separate for every payment.
Principal repaid = payment − interest for the period
A loan payment normally includes interest on the outstanding balance and repayment of part of that balance. In a fixed-payment loan, more of the payment typically goes to principal as the balance falls. For a monthly schedule use the periodic rate specified by the loan and track any fees separately. EMI means equated monthly instalment. At 1% monthly interest, a ₹1 lakh opening balance costs ₹1,000 interest for the first month. A ₹5,000 payment reduces principal by ₹4,000.
At 1% monthly interest, a ₹1 lakh opening balance costs ₹1,000 interest for the first month. A ₹5,000 payment reduces principal by ₹4,000.
A loan payment normally includes interest on the outstanding balance and repayment of part of that balance. In a fixed-payment loan, more of the payment typically goes to principal as the balance falls. For a monthly schedule use the periodic rate specified by the loan and track any fees separately. EMI means equated monthly instalment. At 1% monthly interest, a ₹1 lakh opening balance costs ₹1,000 interest for the first month. A ₹5,000 payment reduces principal by ₹4,000.
What usually happens to interest as the balance falls at a fixed rate?
Full lesson guide
How the idea works
A loan payment normally includes interest on the outstanding balance and repayment of part of that balance. In a fixed-payment loan, more of the payment typically goes to principal as the balance falls. For a monthly schedule use the periodic rate specified by the loan and track any fees separately. EMI means equated monthly instalment.
Principal
The amount borrowed that remains unpaid.
Interest
What the lender charges for the use of the borrowed money.
Apply it to a decision
Fictional example · Read two months of a workshop loan
A workshop owes ₹100,000 at 1% monthly interest and pays ₹6,000 at the end of each month. Ignore fees and round nothing until the end.
What does the workshop owe after two payments?
Set up the problem. Month one interest is ₹1,000. Principal repaid is ₹5,000 and closing balance is ₹95,000.
Work it out. Month two interest is ₹950. Principal repaid is ₹5,050, so closing balance is ₹89,950.
Read the result. Of the ₹12,000 paid, ₹1,950 went to interest and ₹10,050 reduced debt.
Before you use it
Calculate interest on opening principal and carry closing principal into the next row.
Common mistake. Reducing the balance by the entire payment ignores the interest charge.
Separate the interest and principal inside a loan payment.
Formula or rule
Principal repaid = payment − interest for the period
A loan payment normally includes interest on the outstanding balance and repayment of part of that balance. In a fixed-payment loan, more of the payment typically goes to principal as the balance falls. For a monthly schedule use the periodic rate specified by the loan and track any fees separately. EMI means equated monthly instalment. At 1% monthly interest, a ₹1 lakh opening balance costs ₹1,000 interest for the first month. A ₹5,000 payment reduces principal by ₹4,000.
How to approach it
Calculate interest on opening principal and carry closing principal into the next row.
Common mistake
Reducing the balance by the entire payment ignores the interest charge.
Interview recall prompt
Why does a longer loan usually cost more in total interest, all else equal?