Every humm loan repayment covers two things:
Interest: This is the cost of borrowing the money.
Principal: This is the amount you originally borrowed.
In the beginning, more of your payment goes toward the interest, and less toward the principal. But as time goes on, more of your payment will start to reduce the amount you owe (the principal). The loan amortizes over time, which means that by making regular monthly payments, you will pay off the entire loan by the end of the loan term. Your monthly payment stays the same, so it’s easy to budget for, and as long as you make all your payments, the loan will be completely paid off after the agreed-upon period.
If you try to calculate the total annual interest paid by simply multiplying your interest rate by the loan amount, it might not match what you’re actually paying. That’s because the interest you owe is based on the amount you still owe (the principal), and that amount gets smaller as you make payments over time.
In the beginning, you owe more, so the interest is higher. As you make payments and reduce the loan balance, the interest charged also decreases. This is why the total interest you pay over a year won’t be as simple as multiplying your interest rate by your loan amount—it’s adjusted based on your balance as you pay it down each month.
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