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Making a Payment
Now let’s say the next month comes along and we make a payment of $50 on the loan. Let’s see what kind of impact this has on our balance:
$3,015 (the balance owed) – $50 (our payment) = $2,965 (the new balance owed)
But we’re not finished yet! The month comes to an end and it’s time to factor in interest once more! Remember, in this case, interest accumulates based on your current balance owed, so let’s figure it out:
$2,965 (the balance owed) x .06 (the APR) = $177.90
Now, remember, we have to divide by 12 to get the monthly interest.
$177.90 / 12 = $14.83
Notice that the amount of monthly interest that accumulates has dropped from $15.00 to $14.83! This is a result of your payment on the loan. Because interest is based on the principal balance, as you continue to make payments in order to reduce the balance, the loan accumulates less and less interest at the end of each month.
Now, let’s go ahead and capitalize that interest:
$2,965 (the balance owed) + $14.83 (the monthly interest) = $2,979.83 (the new balance owed)
As you can see, interest keeps capitalizing into the balance owed; over time, it can really add up.