You can view what portion of a payment went towards interest vs. principal by navigating to your loan details page and hovering over the info icon of a given payment in your Payment History.
For Simple Interest:
Interest is calculated upfront and applied to the loan - so all payments against simple interest loans are a consistent ratio of (interest) : (principal + interest). For example, if the principal of a loan were $900 and the total value of that same loan was $1,000 including interest, then each payment would have 10% of it go towards interest & 90% go toward the principal.
For Compound Interest:
Payments are applied first to the accumulated interest and then to the principal. Here’s how it works:
- Accrual of Interest: Interest accrues on the outstanding principal of the loan. With monthly compounding, this means that each month, interest is calculated on the remaining principal at the compounded rate. This interest is added to the balance of the loan, increasing the total amount due.
- Payment Allocation: When a payment is made, it is first applied to the interest that has accrued since the last payment. Only after all accrued interest is paid does any remaining portion of the payment reduce the principal. This is standard practice for most loans outside of Pigeon, including mortgages, auto loans, and student loans.
- Effect on Principal: Once the accrued interest is paid off, any remaining payment amount is used to reduce the principal. This decreases the loan balance, which in turn reduces the amount of interest that will accrue in the future.
- Amortization Schedule: Early in the schedule, a larger portion of each payment is allocated to interest. Over time, as the principal decreases, a larger portion of each payment is allocated to reducing the principal.
Disclaimer: Please note that we are not licensed tax professionals or accountants, thus our calculations should only be seen as best-effort attempts. Feel free to use our calculations for annual tax questions or to check against your own amortization schedules after reviewing with professional counsel.