Why is the breakdown of a loan repayment into principal and interest of any importance?
The breakdown between how much of your payment is going toward principal and interest is very important.   The principal balance remaining on your loan is the payoff amount.  Once the principal is paid off, your loan is finished.  Each month, some of your payment goes to pay off the principal, and some goes to pay interest (profit for the bank). Using your example image, let's say that you've just taken out a $300k mortgage at 5% interest for 30 years.  You can click here to see the amortization schedule on that loan.  The monthly payment is $1610.46. On your first payment, only $360 went to pay off your principal.  The rest ($1250) went to interest.  That money is lost.  If you were to pay off your $300k mortgage after making one payment, it would cost you $299,640, even though you had just made a payment of $1250.  Interest accrues on the principal balance, so as time goes on and more of the principal has been paid, the interest payment is less, meaning that more of your monthly payment can go toward the principal.   15 years into your 30-year mortgage, your monthly payment is paying $762 of your principal, and only $849 is going toward interest.  Your principal balance at that time would be about $203k.  Even though you are halfway done with your mortgage in terms of time, you've only paid off about a third of your house. Toward the end of your mortgage, when your principal balance is very low, almost all of your payment goes toward principal.  In the last year, only $513 of your payments goes toward interest for the whole year. You can think of your monthly loan payment as a minimum payment.  If you continue to make the regular monthly payments, your mortgage will be paid off in 30 years.  However, if you pay more than that, your mortgage will be paid off much sooner.  The extra that you pay above your regular monthly payment all goes toward principal. Even if you have no plans to pay your mortgage ahead of schedule, there are other situations where the principal balance matters.  The principal balance of your mortgage affects the amount of equity that you have in your home, which is important if you sell the house.  If you decide to refinance your mortgage, the principal balance is the amount that will need to be paid off by the new loan to close the old loan. It's important because it shows that the amount you owe does not decrease linearly with each payment, and you gain equity as a correspondingly slower rate at the beginning of the loan and faster at the end. This has to be figured in when considering refinancing, or when you sell the place and pay off the mortgage. It also shows why making extra payments toward principal (if your loan permits doing so) is so advantageous -- unlike a normal payment that lowers the whole curve by a notch, reducing the length of time over which interest is due and thus saving you money in the long run. (Modulo possible lost-opportnity costs, of course.) Yes, the distinction between how your funds are applied to principal vs interest is very important. The interest amount charged each period (probably monthly) is not just one fixed sum calculated at the origination, but rather is a dynamically calculated amount that changes each period relative to how much principal is remaining (amount you owe).  The picture you posted showing principal and interest assumes the payer always paid their minimum payment and never made any extra payments of principal. Take a look at the following graph and play around with the extra payment fields. You will see some pretty drastic differences in the Total Interest Paid (green lines) when extra payments are made.  http://mortgagevista.com/#m=2&a=240000&b=4.5&c=30y&e=200&f=1/2020&g=10000&h=1/2025&G&H&J&M&N&P&n&o&p&q&x "The other answers have touched on amortization, early payment, computation of interest, etc, which are all very important, but I think there's another way to understand the importance of knowing the P/I breakdown. The question mentions the loan payment as ""cash outflow"". That is true, but from an accounting perspective (disclaimer: I am not an accountant, but I know enough of the basics to be dangerous), the outflow needs to be directed to different accounts. The loan principal appears as a liability on your personal balance sheet, which you could use, for example, in determining net worth. The principal amount in your payment should be applied to reduce the liability account. The interest payment goes into the expense account.  Another way to look at it is that the principal, while it does reduce your cash account, can be thought of as an internal transfer to the liability account, thus reducing the size of the liability. The interest payment cannot. Aside: From this perspective, the value of the home is an asset, and the difference between the asset account and the loan liability account is the equity in the house (as pointed out in different language by the accepted answer). Of course, precisely determining the value of an illiquid asset like a house at any given moment pretty much requires you to actually sell it, so those accounts are hard to maintain in real-time (the liability of the loan is much easier to track)." It's important because you may be able to reduce the total amount of interest paid (by paying the loan faster); but you can do nothing to reduce the total of your principal repayments. The distinction can also affect the amount of tax you have to pay. Some kinds of interest payments can be counted as business expenses, which means that they reduce the amount of income you have to pay tax on. But this is not generally the case for money used to repay the loan principal. The reason it's broken out is very specific: this is showing you how much interest accrued during the month.  It is the only place that's shown, typically. Each month's (minimum) payment is the sum of [the interest accrued during that month] and [some principal], say M=I+P, and B is your total loan balance.  That I is fixed at the amount of interest that accrued that month - you always must pay off the accrued interest.  It changes each month as some of the principal is reduced; if you have a 3% daily interest rate, you owe (0.03*B*31) approximately (plus a bit as the interest on the interest accrues) each month (or *30 or *28).  Since B is going down constantly as principal is paid off, I is also going down. The P is most commonly calculated based on an amortization table, such that you have a fixed payment amount each month and pay the loan off after a certain period of time.  That's why P changes each month - because it's easier for people to have a constant monthly payment M, than to have a fixed P and variable I for a variable M. As such, it's important to show you the I amount, both so you can verify that the loan is being correctly charged/paid, and for your tax purposes.
Paying the minimum balance on a loan can be DEVASTATING and is highly UN-RECOMMENDED. It is important you understand your loan and the terms associated with it. Loans are given for a period of time but if you pay the minimum it does NOT mean you will pay it all off by the end. When paying a loan money is applied to the interest first and any extra amount is then applied to the principle. Here's an example: If I have a $12 loan for 1 year. The interest is 100%. My minimum payment each month is $1. If I pay that minimum only I will be stuck paying $12 at the end of the loan. Why you ask? because each month I'm being charged $1 interest and the payment I am making is only going towards that interest. However if I paid $2 instead now $1 goes to the principal (the original $12 I borrowed). This means that next month I will only be charged interest on $11 dollars instead of $12. You need to know how much is going towards the interest of your loan and how much is going towards the principle you can speak with your bank about this and they will help you understand. In many cases they actually provide you with the numbers on your statment with examples of how long it would take to payoff your loan with minimum only and how long it would take if you added an extra x amount each month. I recommend using the Snowball Method to pay of your debt. It's simple and effective. How much you should add to each monthly payment depends on how much you can afford to add. Here are some calculators you can play around with: CNN Money Bank Rate Calc Edit: So with the additional information you provided we can estimate that you have about 2200 free cash flow each month(that's your cash after you pay all your bills). We can put away 500 each month for a rainy day fund, just to be safe.(job loss, accidents, or anything we can't predict) So assuming that is all your expenses including the money you spend on entertainment. That leaves you with $1700 you can add on to your loan payments. So you can pay off your third loan in 1 month. Then add the remaining balance to the 2nd loan. With this income it should take you less then a year to pay off all your loans. "So with any debt, be it a loan or a bond or anything else, you have two parts, the principal and the interest. The interest payment is calculated by applying the interest % to the principal. Most bonds are ""bullet bonds"" which means that the principle remains completely outstanding for the life of the bond and thus your interest payments are constant throughout the life of the bond (usually paid semi-annually). Typically part of the purpose of these is to be indefinitely refinanced, so you never really pay the principal back, though it is theoretically due at expiration.  What you are thinking of when you say a loan from a bank is an amortizing loan. With these you pay an increasing amount of the principal each period calculated such that your payments are all exactly the same (including the final payment).  Bonds, just like bank loans, can be bullet, partially amortizing (you pay some of the principle but still have a smaller lump sum at the end) and fully amortizing. One really common bullet structure is ""5 non-call 3,"" which means you aren't allowed to pay the principle down for the first three years even if you want to! This is to protect investors who spend time and resources investing in you!" Unless you are getting the loan from a loan shark, it is the most common case that each payment is applied to the interest accrued to date and the rest is applied towards reducing the principal.  So, assuming that fortnightly means 26 equally-spaced payments during the year, the interest accrued at the end of the first fortnight is $660,000 x (0.0575/26) = $1459.62 and so the principal is reduced by $2299.61 - $1459.62 = $839.99 For the next payment, the principal still owing at the beginning of that fortnight will be $660,000-$839.99 = $659,160.01 and the interest accrued will be $659,160.01 x (0.0575/26) = $1457.76 and so slightly more of the principal will be reduced than the $839.99 of the previous payment.  Lather, rinse, repeat until the loan is paid off which should occur at the end of 17.5 years (or after 455 biweekly payments). If the loan rate changes during this time (since you say that this is a variable-rate loan), the numbers quoted above will change too. And no, it is not the case that just %5.75 of the $2300 is interest, and the rest comes off the principle (sic)? Interest is computed on the principal amount still owed ($660,000 for starters and then decreasing fortnightly). not the loan payment amount. Edit  After playing around with a spreadsheet a bit, I found that if  payments are made every two weeks (14 days apart) rather than 26 equally spaced payments in one year as I used above, interest accrues at the rate of 5.75 x (14/365)% for the 14 days rather than at the rate of (5.75/26)% for the time between payments as I used above each 14 days, $2299.56 is paid as the biweekly mortgage payment instead of the $2299.61 stated by the OP, then 455 payments (slightly less than 17.5 calendar years when leap years are taken into account) will pay off the loan.  In fact, that 455-th payment should be reduced by 65 cents.  In view of rounding of fractional cents and the like, I doubt that it would be possible to have the last equal payment reduce the balance to exactly 0. "Sorry in advance, but this will be long.  Also, it sounds like your friend is a tool. I hope this ""friend"" is not also your financial advisor... they would be encouraging you to make a very poor investment decision. They also don't know how to do financial math.  For what it's worth, I am not wrong. I have correctly answered a set of changing questions as you have asked them... Your friend is answering based on a third, completely different investment model, which you proposed in the edit to your last post. If that's what you meant all along, then you should have been more clear in the questions you were asking.  Please let me layout the following: How the previous questions//investment proposals were built How to analyze this current proposal What your other option is Why the other option is best in a 'real world' market The First Question My understanding of the initial proposal was to take out a $10,000 loan, invest the proceeds, and expect to not have any money of your own tied up in this. Because that OP did not specify that this is an interest-only loan (you still haven't in any of your questions), the bank will require you to make payments back to them each month that include principal and interest.  Your ""friend"" is talking about the total interest paid being the only cost of a loan. While that is (almost) true, regardless of what your friend says, significantly more cash is involved in making sure that all the payments are made on time---unless you set up an interest-only loan. But with the set up laid out in this post, and with the assumptions I specified there, the principal payments must be included because the borrower has to pay back the bank and isn't not tying up any of their own money.  In that case, my initial analysis is correct--your breakeven is in the low teens for an annual required return.  The Second Proposal Your second proposal... before any edits... refined things a little bit, to try to capture the any possible returns by not selling something. As I indicated there, (with what was an exaggerating assumption), the lack of clarity makes for an outlandish required return.  The Second Proposal...with edits, or the one proposed above I will get to the one proposed above in a second, but first let me highlight a few problems with your friend's analysis.  Simple interest: the only place (in the US at least) that will lend with simple interest is student loans. Any loan that you actually take out will be compound interest.  Not an interest only loan: your ""friend"" is not calculating interest correctly. Since this isn't an interest-only loan, the principal balance will reduce every time you make a payment, by ~$320-$340 each month. This substantially reduces the total interest paid, to $272.79 over the total 24 months.  ""Returns"": I don't know what country, or what business your friend works in, but ""returns"" are a very ambiguous concept. Investopedia defines returns as gains or losses. (I wish I could inhabit the lala land that your friend lives in when returns are always positive). TheFreeDictionary.com defines a return for finance as ""The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.""  When you have not made it clear that any other money is being used in this investment plan (as was the case in scheme #1 and scheme #2a,) the loan still has to be paid. So, clearly the principal must be included in the return calculations.  How to evaluate this proposed investment scheme Key dimensions: Loan ($8,000 ... 24 months ... 0.27% monthly rate... monthly compounding... no loan origination fees) Monthly payment (PMT in Excel yields $344.70). Investment capital (starting = $8,000) Monthly Return (Investment yields... we hope it's positive!)  Your monthly contribution from your salary Taxes = 10%. Transaction Fees = $20  Go and lookup how to build an amortization table for a loan in Excel. Your life will be infinitely better for it.  Now, you get this loan set up and invested into something... (it costs $20 to buy the assets).  So you've got $7980 chugging away earning interest. I calculate that your break even, with you paying in $344.70 of your own money each month is 1.81% annually, or 3.42% over the 24 month life of this scheme. That is using monthly compound interest for the payments, because that's what the real world would use, and using monthly compounding of the investments' returns.  Your total interest expense would be $272.79.  This seems feasible. But let's talk about what your other option is, given that you're ready to spend $344.70 each month on an investment.  Your other option  I understand the appeal of getting $8,000... right away... to invest in something. But the risk behind this is that if the market goes down (and markets do) you're stuck paying a fixed amount for your loan that is now worth less money.  Your other option is to take your $344.70, and invest it step-by-step. (You would want to skip a month or two buying assets in the market, so that you can lessen transaction costs). This has two advantages: (1) you save yourself $272 in interest. (2) When the market goes down, you still win.  With this strategy, you still win when the market goes down because of what is commonly called ""dollar cost averaging"". When the market is up, your investments are also up. When the market goes down, your previous investments decrease in value but you can invest new money at the lower rates.  Why the step-by-step, invest your own money strategy is better At low rates (when you're looking for your break-even), the step-by-step model outperforms the loan. At higher rates of return (~4% + per year), you get the benefit of having the borrowed money earning more gains.  In fact, for every continuous (meaning set... not changing month-to-month) interest rate that you can dream up that is greater than about 4% per year, the borrowed money earns more.  At 10% per year, the borrowed money will earn about $500 more over the 2 years than your step by step investment would.  BUT I recognize that you might feel like the market will always go up. That's what everyone thinks. And that's alright.  But have one really bad month, or a couple of just-not-great-months, and your fixed 'loan' portfolio will underperform. Have a few really bad months, and your portfolio could be substantially reduced in value... but you would still be paying the same amount for it each month.  And if that happened (say your assets declined -3% in 3 of the 24 months...) You'd be losing money relative to the step-by-step portfolio." Because they receive compensation (generally interest + dividends) for loaning out the shares. I own an asset X.   Somebody else wants to borrow asset X for some time period.   I agree to loan them asset X in return for some form of compensation (generally a rate of interest plus, in this specific case, any dividend payments).  The reasons why I own asset X, and why they want to borrow asset X are irrelevant to the transaction. The only relevant points are the amount of compensation and the risk that they might default on the loan. This applies equally well to shares as to money or any other kind of loan-able asset. It also reduces risk from the bank's eyes. Believe it or not, they do lose out when people don't pay on their mortgages. Take the big 3 (Wells, Chase and BoA). If they have 50 million mortgages between the 3 of them and 20% of people at one point won't be able to pay their mortgage due to loss of income or other factors, this presents a risk factor. Although interest payments are still good, reducing their principal and interest keeps them tied down for additional (or sometimes shorter) time, but now they are more likely to keep getting those payments. That's why credit cards back in 07 and 08 reduced limits for customers. The risk factor is huge now for these financial institutions. Do your research, sometimes a refi isn't the best option. Sometimes it is. Compound growth isn't a myth, it just takes patience to experience.  A 10% annual return will double the investment not in 10 years, but just over 7.  Even though a mortgage claims to use simple interest, if your loan is 5% and there's 14 years to go, $100 extra principal will knock off $200 from the final payment. The same laws of compounding and Rule of 72 are at play. I am not a structured products expert, just relaying what's in the article, but I'd imagine it includes a larger equity tranche in the structured product, thereby giving more cushion against losses to the actual debt investors in the tranches above it in the payment water fall.