What does it mean if a borrower pays principal-only payments?

What does it mean if a borrower pays principal-only payments?

• A. They are paying off only the interest
• B. They are reducing the overall debt faster
• C. They are not required to pay any interest
• D. They are making extra payments on the loan terms

Answer: (B)

When a borrower makes principal-only payments, they are effectively reducing the overall debt faster. This approach allows borrowers to directly decrease the principal balance of their loan without adding any more interest on top of it. By focusing on the principal amount, they can lessen the total interest they will pay over the life of the loan because interest is calculated on the remaining principal balance. This strategy can lead to significant savings in interest payments and may shorten the duration of the loan. It's important for borrowers to understand that while making principal-only payments can accelerate their journey to being debt-free, it is typically done in addition to regular payments on interest, unless specified otherwise by the terms of their loan agreement.

When a borrower makes principal-only payments, they are effectively reducing the overall debt faster. This approach allows borrowers to directly decrease the principal balance of their loan without adding any more interest on top of it. By focusing on the principal amount, they can lessen the total interest they will pay over the life of the loan because interest is calculated on the remaining principal balance.

This strategy can lead to significant savings in interest payments and may shorten the duration of the loan. It's important for borrowers to understand that while making principal-only payments can accelerate their journey to being debt-free, it is typically done in addition to regular payments on interest, unless specified otherwise by the terms of their loan agreement.