how interest affects principal
the amount of interest you pay on a loan is determined by the principal amount the larger the principal the higher your interest payments will be interest is either simple or compounded depending on the loan terms simple interest is calculated on only the original principal compound interest is calculated on the principal and any accumulated interest much of the payment goes towards interest when you begin making monthly payments on a loan the remainder is applied to your principal more payments will be applied to the principal as you continue paying the loan paying down the principal of a loan can reduce the amount of interest that accrues each month the amount of the principal balance of a loan can influence its interest rate especially in the context of mortgages jumbo mortgages that exceed the loan limits set by fannie mae and freddie mac often have higher interest rates than smaller conforming loans but this rate difference isn t always consistent jumbo rates can sometimes be lower than conforming rates due to fluctuations in supply and demand for both types of loans 