← Money, Drawn · Lesson 4 of 4
A loan's shrinking slice
A loan works the same way in reverse. Each month the lender cuts an interest slice from what you still owe, and your payment covers that slice first. Whatever is left of the payment shortens the bar.
Early on the bar is long, so the interest slice is big and most of the payment goes to it. As the bar shrinks, the slice shrinks, and more of the same payment goes to the loan itself.
That is why paying a little extra early on shortens a loan so much: every extra dollar shortens the bar the next slice is cut from.
You owe $10,000. Interest is 6% a year, charged as 0.5% each month. What is the first month's interest slice?
A lesson is kept once you've answered the question and written at least 8 words. Nobody grades it; it stays on this device.