If a significant portion of your monthly payment is going to pay the montly interest on your loan, then your loan term is very long…meaning that your monthly payment is very low.
These things all work in concert together. The mechanics of financing and the terms of interest, payment, and term, are not that complex. High school students should be able to master them and are frequently taught these days in high school financial literacy classes.
There should be no reason for people to claim “after the fact” that they got screwed by the financing company. These are relatively simple concepts to understand.
I’m not sure where you came up with that 500 fee figure. Most loans are simple in that they do NOT have an origination fee - mortgages being the notable exception; also Lending Club loans have a fee.
Also I’ve never personally had a loan that had any kind of prepayment penalty. I had heard of such things, e.g. GMAC car financing in former days, and some mortgages. I seem to recall that prepayment penalties of any kind are rare on mortgages unless they’re the subprime / predatory sort (designed to keep people from being able to refinance even when they would otherwise qualify to do so).
All that sald: yes, in the early days of a loan, 80% going to interest is not out of line. I plugged 5,000 at 12% for 8 years into the calculator at bankrate.com, and got 50 dollars in interest on a payment of 81.26. As others have said, in each given month you’re paying a bit of principal, plus interest on last month’s outstanding principal. in one month, 12% interest on 5,000 is 50.00.
Link to bankrate amortization schedule / payment calculator: http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
For the second month, you’re paying that 12% on only 4,969.74. So your interest that month is only 49.69 - and for that same 81.26 payment you’re now paying an extra 31 cents in principal, or 81.57.
And so on. Any fix-payment loan is gonna work the same - mortgage, car payment.
If your friend paid a little extra every month, that won’t affect his monthly payment, BUT it will affect the length of the loan. throwing an extra 10 dollars at the payment will ultimately save him nearly 2 years and 500 bucks in interest.