ShmoopTube

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finance a la shmoop what is principle answer its the loan amount you borrow

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when you do you sign a bunch of papers promising to pay back the principal and [Person signs paper]

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the interest that goes with it and that interest is like rent you have to rent

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that money you swear up and down you'll pay back the principal that princess is

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not necessarily your pal it might be a monkey on your back it might be a mule [Mule kicking a man]

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that kicks you the wrong way but you owe it you owe that principal to the lender

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who loaned it to you and you want to put it on a diet as fast as you can

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why well because when that principal shrinks the rent you owe on it shrinks

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as well all right here's some simple math you borrow 40 grand by a

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three-year-old ludicrous mode enabled Tesla with a few minor dents and you [Man driving a supercar]

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know you got a few shards of deer antlers stuck in the grille there for

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free you are considered a risky bet by the lenders loaning you your money or

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principle partly because of the way you drive so the rent on that principle 12%

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a year or 1% a month big interest rates because well you're such a crappy driver

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so on 40 grand of principal the cost to rent that money is 400 bucks a month or

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$4,800 a year that is just to stay even on the principle you've borrowed you [Principal interest payment chart appears]

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have to pay $400 every month and that's just the interest if you paid 30 40 50

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60 months of 400 bucks a month well you would still owe that principal of 40

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grand because all you did was baby interest or rent on it

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ouch but what if he went six months paying a full thousand dollars a month

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yes much would go from not eating or something like that well what would [Guy driving blue tesla]

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happen think about that first month you've quote overpaid unquote by 600

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bucks so if your loan resets or recalibrates every month well then you

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get to put your principal at least a little bit on a diet so after that first [Principal constricted by tape measure]

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month of paying a grand your 40 grand in debt goes down to thirty nine thousand

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four hundred dollars pay a thousand bucks another month and while you're

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still paying twelve percent a year or one percent a month to rent that money

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only now that monthly rent was reset at one percent of thirty nine thousand four

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hundred or 394 bucks right six dollars cheaper

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than the 400 you started with but you paid a grand so now you get to use 606

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dollars to pay down the principal and see the math there the new principal

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thirty nine thousand four hundred minus at six hundred six it's now thirty eight

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thousand seven hundred ninety four dollars that you owe do a grand another

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month and you get to pay down even more of the principal about three hundred

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eighty eight bucks is attributable to interest but you paid a grand so that's

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a thousand minus the three eighty eight there so then that goes to principal pay

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down or $612 a principal pay down alright you're getting the gist here as

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you paid down the principal you get to attribute more and more of that made-up [Clock ticks as money stacks land]

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thousand dollars a month payment so check out what happens when you just

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keep going and as we look a couple of years into the future just look at how

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little interest there is now here relative to what there was when we

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started so yeah it's totally worthwhile to pay

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more than minimum payments when you can and you know really as much as you can

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manage that way when your bank statement for what you owe arrives in the mail you [Bank statement appears through letter box]

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you know don't feel like a dear

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