How is interest applied on an RV loan?
When you take out a 10 year RV loan, is the interest spread out equally across all the payments or is it mostly paid up front like a home mortgage?
Forum Discussion
95jersey wrote:
Hmmm. While I do understand simple interest, there is a major difference on how a mortage works, compared to a simple interest curve. Under a 30 year mortgage, I would be paying something like 80% interest for say the 1st 10 years, meaning I paid little to no primary. While it is what it is on a house and we have little choice as we NEED a home loan. I certainly don't want to pay mostly interest the 1st 5 years of an RV loan like a house and still owe the majority of the principle.
I don't think you do understand how simple interest works.
Let's assume they calculate interest monthly (daily, weekly hourly...works the same just have to adjust for the length of time):
At the beginning of the month, they take the current balance and multiply it by the interest rate (again adjusted for the time period, so monthly would be roughly 1/12th the annual rate). This is the interest you pay for the month.
When you make a payment, they first put enough of the money to cover the interest and the remaining amount goes to paying off principal.
No trickery or evil intent, early in the loan, the principal is very high, so the monthly interest is also. At the end of the loan the principal is small so the monthly interest is also small. Towards the end, you effectively have a very small loan.
Mortgage, vehicle, person doesn't matter what type of loan, they all calculate similarly (interest rates are often different though).
The difference you see with a 30yr Mortgage vs a 10yr RV Loan is due to the length of the loan. To pay off the loan 3 times faster, the 10yr loan payment is larger so you pay off more principal each month, particularly early on.
With a 30yr mortgage, the principal paid on early payments can be very low as you have a very long time to pay off the principal. This is also why a handful of extra payments early in the loan can knock years off the loan.
PS: Mortgage payments often include escrow for insurance and other items which aren't really part of the loan, so you need to account for that as you would be paying that regardless of having a loan or not. Also, there are some minor variations in how the interest is calculated but usually not enough for the average consumer to care about the differnce
