THE PLAYGROUND
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 if the annual payment is smaller than the interest charge?
First-year 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 |
Only interest is an expense here. Principal repayment reduces debt and cash; it does not reduce profit. Read real covenants and default terms before assuming a short payment can be rolled into principal.
Model assumptions & units
Five annual periods, constant rate, no fees. Payments first cover interest. Insufficient payments increase the balance in this illustrative model; real contracts may default rather than permit capitalization.