15 Jun 2022

What is principal reduction? – Is it better to pay on the principal or interest?

Principal Reduction

When you reduce the principal amount on a loan, it is called a principal reduction. While some countries and states in Australia offer residents principal reduction grants, this is not the case for everyone.

Since this is true, it is essential to stay calm and look at the differences between the principal amount and the interest. The principal amount is what is left on a loan before interest is added with each repayment. Typically, you take out a principal amount, which is then increased by a specific interest rate.

It is better to pay the principal amount. The lower your principal loan is, the lower the monthly amount. This also leads to a decrease in interest. However, just paying interest will not make a dent in the principal amount, leading to higher monthly and fortnightly repayments.

If you are interested in a loan, contact one of our expert Mortgage House specialists! They are happy to assist and can find the best and most competitive interest rates in the entire country. All loans are personalised to fit you and your needs.

Paying the Principal Vs the Interest Conclusion

Paying only the interest in a loan is not recommended. Instead, it is important to pay the principal amount. If you want to lower your overall principal amount, then you can make larger repayments so that the principal amount is reduced. This is as easy as changing the repayment date or adding extra payments throughout the statement.

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