Interest: The Hidden Cost of Every Loan
Interest is the cost of borrowing—and it adds up fast. A $350K mortgage at 6.5% costs $446K in interest over 30 years (127% of the loan!). Credit cards are worse: $5K at 24.99% with minimum payments can cost $7,432 in interest. Understanding how interest is calculated saves thousands.
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Each payment splits between interest (based on current balance) and principal. Early payments are mostly interest; later payments are mostly principal. Daily vs monthly compounding: ~$15/yr difference on $100K at 6%, compounds over decades. The Rule of 78s front-loads interest—always ask your lender how interest is calculated.
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Why: Most loans use amortized interest—early payments are mostly interest, later payments mostly principal. This front-loads your cost. Extra principal payments reduce total interest significantly. Some predatory loans use the Rule of 78s, which front-loads interest even more—banned in many states.
How: Enter loan amount, annual rate, term, and payment/compounding frequency. The calculator shows monthly payment, total interest, total cost, and a payment schedule. Add extra payments to see how they shorten payoff and reduce interest. Compare daily vs monthly compounding.
Run the calculator when you are ready.
📋 Example Scenarios — Click to Load
Total Interest by Loan Type
Interest vs Principal Over Time (Amortization)
Simple vs Compound Interest Growth
Interest Cost by Rate (Same Loan)
Payment Schedule (First 12)
| # | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $1,580.17 | $226.00 | $1,354.17 | $249,774 |
| 2 | $1,580.17 | $227.23 | $1,352.94 | $249,547 |
| 3 | $1,580.17 | $228.46 | $1,351.71 | $249,318 |
| 4 | $1,580.17 | $229.70 | $1,350.47 | $249,089 |
| 5 | $1,580.17 | $230.94 | $1,349.23 | $248,858 |
| 6 | $1,580.17 | $232.19 | $1,347.98 | $248,625 |
| 7 | $1,580.17 | $233.45 | $1,346.72 | $248,392 |
| 8 | $1,580.17 | $234.71 | $1,345.46 | $248,157 |
| 9 | $1,580.17 | $235.98 | $1,344.19 | $247,921 |
| 10 | $1,580.17 | $237.26 | $1,342.91 | $247,684 |
| 11 | $1,580.17 | $238.55 | $1,341.62 | $247,446 |
| 12 | $1,580.17 | $239.84 | $1,340.33 | $247,206 |
For educational purposes only — not financial advice. Consult a qualified advisor before making decisions.
💡 Money Facts
A $350K mortgage at 6.5% costs $446K in interest over 30 years—127% of the loan
— Bankrate
$5K at 24.99% with minimum payments can cost $7,432 in interest (149% of balance)
— CFPB
Daily vs monthly compounding: ~$15/yr difference on $100K at 6%
— Investopedia
The Rule of 78s front-loads interest and is banned in many states for consumer loans
— CFPB
Extra principal payments reduce total interest by cutting the balance faster
— Federal Reserve
Most consumer loans use compound interest; some short-term loans use simple interest
— Investopedia
Interest is the cost of borrowing money — and it adds up fast. A $350K mortgage at 6.5% costs $446K in interest over 30 years, meaning you pay 2.27x the original loan amount. Credit cards are worse: $5K at 24.99% with minimum payments costs $7,432 in interest (149% of the balance!). Most loans use amortized interest (equal payments, front-loaded interest). Some predatory loans use the 'Rule of 78s' which front-loads interest even more aggressively — this is banned in many states. Understanding how interest is calculated saves thousands.
📖 How Loan Interest Works
Each payment splits between interest (based on current balance) and principal. Early payments are mostly interest; later payments are mostly principal. Extra payments reduce total interest by cutting the balance faster.
📐 Key Formulas
Monthly Payment: M = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]
Total Interest: (M × n) − P
Simple Interest: P × r × t
⚠️ Rule of 78s
The Rule of 78s front-loads interest. If you pay off early, you get less benefit. Banned in many states for consumer loans. Always ask your lender how interest is calculated.
💡 Daily vs Monthly Compounding
On $100K at 6%, daily compounding yields ~$6,183 in year-one interest vs $6,168 for monthly — about $15/yr difference. Small but compounds over decades.
🎯 Tips to Save on Interest
- Make extra principal payments when possible
- Choose shorter terms for lower total interest
- Refinance when rates drop significantly
- Avoid credit card minimum payments — they extend payoff for decades
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