Overhaulin'

Is interest based on original loan amount or current amount owed?

Suppose I have a loan (student, car, or whatever) that accrues interest daily. Also, suppose that I make monthly payments on this loan. The interest that has accured since my last payment will be payed off by this monthly payment and what is left of my montly payment goes towards the amount borrowed. So, obviously, over time the amount owed will go down. Anyway, getting to my question, is the daily interest calculated based on the initial loan amount, or the current amount owed? Thank you for your help.

Public Comments

1. It's based on the current amount owed. That's why even though your monthly payments stay the same, the amount going toward the principal increases each month. As you pay down the loan, the interest paid each month decreases, allowing more to go toward the principal. Each monthly payment is allocated as follows: payment - (current amount owed * monthly interest rate) = reduction in principal.
2. Interest is always based on the current principal amount.