Question

When you make a loan payment, what does your money go towards first: the loan principal or accrued interest?

a) Loan principal
b) Accrued interest
c) It's split equally between principal and interest
d) Depends on the lender's policy

Answer 1

Loan payments are typically applied to accrued interest first, then the remaining amount is put towards reducing the loan principal. This is standard practice although loan terms can vary with different lenders. So, the correct answer is option c.

Step-by-step explanation:

When you make a loan payment, your money typically goes towards the accrued interest first, and then any remaining amount is applied towards the loan principal. This is the common practice among lenders, though policies can vary and it's always important to understand the specific terms of your loan agreement.

For example, if you send a payment of $60, a portion of this payment will be used to cover the accrued interest, while the remainder pays down the principal. This ensures that the interest, which is the cost of borrowing, is paid off first before the actual loan amount is reduced. If the terms of your loan include compound or simple interest, it's important to note that simple interest is calculated only on the principal amount.

So, the correct answer is option c.