<prompt> Human: I hear people talking about this with loans, and Ive never really understood. Some people say things like you should make sure this payment is applied to principal, not interest, and I dont understand why it matters.When interest is calculated, isnt it calculated on the total balanced owed at that moment, which includes both principal and whatever previous interest has been charged? So why would I consider them separately when it comes to making payments?  <response>: They dont say what they mean. There are two ways the bank applies your extra payment. The wrong way: Prepaying to defer your due date. The bank holds onto your cash for free and merely pushes back your next payment due date. Youll still pay the same amount, except that now you are giving them an interest-free loan. The right way: Paying down the balance aka applying it to principal. The bank reduces your loan balance and re-amortizes the loan. Youll pay less overall this way. 