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Interest is not principal
See where every payment goes.
Live experiment
Interest is not principal
Debt after five years0
Before you move a sliderWhat happens when the annual payment is smaller than the interest charge?
Year-one interest = 10000 × 8% = 800
| Year | Interest | Payment | Principal repaid | Closing debt |
|---|---|---|---|---|
| 1 | 800 | 3,000 | 2,200 | 7,800 |
| 2 | 624 | 3,000 | 2,376 | 5,424 |
| 3 | 433.9 | 3,000 | 2,566.1 | 2,857.9 |
| 4 | 228.6 | 3,000 | 2,771.4 | 86.6 |
| 5 | 6.9 | 93.5 | 86.6 | 0 |
Read the mechanism
Only the interest is an expense. Repaying principal reduces debt and cash but never touches profit. Read the actual covenants before assuming a short payment can be rolled forward.
Model assumptions and units
Five annual periods, a constant rate and no fees. Payments cover interest first. A payment that is too small makes the balance grow in this model; a real contract would usually call that default rather than capitalized interest.