Getting Out of Debt: Does That Extra Payment Go to the Principal or the Interest?

mortgage payments There is only one way to get out of debt on a loan: pay down the principal of it. Are those extra payments you are making actually going toward the principal of the loan or toward the interest or next payment. It is important to know the difference, or you may not making as big a dent in your loan as you think.

What Is Principal Versus Interest?

When you take out a loan the specific amount of the loan is the principal. Whether this is a $300,000 mortgage or a $2,000 student loan makes no difference. When you use credit cards, you are also taking out a loan.

In order to make loaning you money worthwhile, the company or person who hold the loan adds interest. This interest adds greatly to what you are actually paying. For example, a $75,000 loan over a course of 30 years with an interest rate of 7 percent will make the cost of the loan grow to $180,000. Each month, a small percentage of the money in the payment goes to the principal and the rest to interest.

Making Extra Payments to Reduce Principal

When you want to reduce the amount left on your loan, you need to pay extra payments to it and apply them to the principal of the loan. The lower the amount of the principal, the less interest will be charged on it. You have to be careful, though, because banks and companies love to apply extra payments to the next scheduled payment instead toward the principal. This will reduce the impact you are making toward paying off your loan.

You want to call your loan holder and make sure that you understand how to apply extra payments to your principal. It may be as easy as checking off a box on your payment stub or as complicated as writing a letter with your intention or adding the extra payment on a certain day of the month.

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About Mary Ann Romans

Mary Ann Romans is a freelance writer, online content manager, wife and mother of three children. She lives in Pennsylvania in the middle of the woods but close enough to Target and Home Depot. The author of many magazine, newspaper and online articles, Mary Ann enjoys writing about almost any subject. "Writing gives me the opportunity to both learn interesting information, and to interact with wonderful people." Mary Ann has written more than 5,000 blogs for Families.com since she started back in December 2006. Contact her at maromans AT verizon.net or visit her personal blog http://homeinawoods.wordpress.com

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