Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan.
Answer the following statement true (T) or false (F)
False
Rationale: There is no reason to think that this statement would always be true. The portion of the payment representing interest declines, while the portion representing principal repayment increases. Therefore, the statement is false. We could also work out some numbers to prove this point. Here's an example for a 3-year loan at a 10% and a 41.45% annual interest rate. The interest component is not equal to the principal repayment component except at the high interest rate.
| Original loan | $1,000 | Original loan | $1,000 |
| Rate | 10% | Rate | 41.45% |
| Life | 3 | Life | 3 |
| Payment | $402.11 | Payment | $640.98 |
| Beg. | End | Beg. | End | ||||||
| Balance | Interest | Principal | Bal. | Balance | Interest | Principal | Bal. | ||
| 1 | $1,000.00 | $100.00 | $302.11 | $697.89 | 1 | $1,000.00 | $414.50 | $226.48 | $773.52 |
| 2 | $697.89 | $69.79 | $332.33 | $365.56 | 2 | $773.52 | $320.62 | $320.36 | $453.15 |
| 3 | $365.56 | $36.56 | $365.56 | $0.00 | 3 | $453.15 | $187.83 | $453.15 | $0.00 |
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