Educational information, not individual financial advice.
Key Takeaways
Every debt — credit card, car loan, student loan, mortgage — has the same three variables:
From those three, a formula produces a fixed monthly payment for most installment loans. Revolving debt (credit cards, HELOCs) works a little differently — the minimum payment is a percentage of the current balance rather than a fixed amount.
When you borrow $10,000 at 6% annual interest for 5 years, you're effectively renting that money from the lender. The lender has the money, you need it now, and 6% per year is the rent. Over the 5-year life of the loan, you'll pay about $1,600 in total interest, for a total payoff of around $11,600.
That's the trade. You get the cash today; the lender gets the cash plus interest over time.
For a standard amortizing loan, the monthly payment is:
P = L × [r(1+r)^n] / [(1+r)^n − 1]
Where L = loan amount, r = monthly interest rate (annual rate / 12), n = number of months.
You don't need to remember this — any calculator will do it for you. What matters is intuition: payment goes up as rate goes up or term shortens, and down as rate drops or term extends.
Here's the counterintuitive part: on a 30-year mortgage, your first payment might be 90% interest and 10% principal. Your last payment might be 1% interest and 99% principal.
This happens because interest is charged on the current balance. Early in the loan, the balance is high, so the interest portion is high. Each payment reduces the balance slightly, and the next month's interest is slightly lower — which means slightly more of the same fixed payment goes to principal. The shift happens gradually but it compounds.
On a 30-year, 6% mortgage for $300,000:
The interest payments alone are more than the original principal. This is the cost of borrowing money for a very long time.
The principal stays constant, but total interest grows dramatically as rate or term increases:
| Loan | Rate | Term | Monthly | Total interest |
|---|---|---|---|---|
| $300k | 3% | 30yr | $1,265 | $155,332 |
| $300k | 6% | 30yr | $1,799 | $347,515 |
| $300k | 6% | 15yr | $2,532 | $155,683 |
| $300k | 8% | 30yr | $2,201 | $492,456 |
A 15-year mortgage at 6% costs the same in total interest as a 30-year at 3% — but requires nearly double the monthly payment. Trade-offs.
A rough taxonomy:
Usually reasonable — low-rate, asset-backed, appreciating asset:
Usually problematic — high-rate, unsecured, or depreciating asset:
Depends on specifics:
The 23% APR credit card balance is the most expensive money most consumers will ever borrow and should be paid off before almost any other financial goal, including retirement contributions beyond the employer match.
Each liability you enter has a rate, balance, and payment. The engine amortizes it correctly each month, splitting interest from principal. When the balance hits zero, the linked payment expense disappears and the cash flow is redirected to savings or discretionary spending per your Budget Rules.
On a brand-new 30-year mortgage, why is your first monthly payment almost all interest and very little principal?
Try it in your scenario
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