Question

You decide to borrow 32,000 to put in a new swimming pool you obtain a loan for 25 years making equal monthly payments after how many years will the greatest amount of your payment be going towards principal?

O 1 year
O 24 years
O 5 years
O 20 years

Answer 1

The greatest amount of the payment will go towards the principal in the later years of the loan. For a 25-year loan, this would typically be after 24 years, as that's when the interest portion has decreased significantly.

Step-by-step explanation:

For a loan like a mortgage, the structure of the payments is such that you pay more interest at the beginning and more towards the principal as time goes on. This is because the interest portion of each payment is calculated on the remaining balance, which decreases as you make payments. In a standard fixed-rate loan amortization, you pay the same total amount each month, but the composition of the payment changes over time.

The loans described in the question and the given examples commonly use a method called amortization to schedule payments. With this method, the initial payments are heavily weighted towards the interest, and over time, a greater proportion of the payment is applied to the principal. Because of this, in the later years of the loan, especially the last one, you pay the most toward the principal.

Therefore, given the options, the final answer is that the greatest amount of your payment will be going towards the principal after 24 years, which is the time period close to the end of the 25-year loan term.