Yusra3
VIP Contributor
Capitalized interest is the amount of interest that accumulates on a loan. When you take out a student loan, the lender will charge you interest on your loan for at least 3 years. The interest charges are added to the principal amount of the loan, which means that if you don't pay off your student loans during those 3 years, they'll have grown by the amount of interest accrued during that time.
For example, if you take out a $5,000 loan from your bank and pay $100 per month for 10 years, then the total amount paid out will be $50,000. Of course, that's only half of what was borrowed! But if you had taken out a $10,000 loan instead of a $5,000 one, then you would have paid off your entire loan in just five years and your monthly payments would be much lower than they would be if you had borrowed less money than originally agreed upon (and therefore were paying more interest).
This may seem like an unfair system, but there are many reasons why it's better than other methods of paying off debt:
1. It allows borrowers to spread out payments over a longer period of time than they could if they had just paid a lump sum of cash each month (which would mean more money spent).
2. It gives borrowers an incentive to manage their finances responsibly so as not to become over-extended on their credit card balances or other debts (therefore reducing their overall debt burden).
For example, if you take out a $5,000 loan from your bank and pay $100 per month for 10 years, then the total amount paid out will be $50,000. Of course, that's only half of what was borrowed! But if you had taken out a $10,000 loan instead of a $5,000 one, then you would have paid off your entire loan in just five years and your monthly payments would be much lower than they would be if you had borrowed less money than originally agreed upon (and therefore were paying more interest).
This may seem like an unfair system, but there are many reasons why it's better than other methods of paying off debt:
1. It allows borrowers to spread out payments over a longer period of time than they could if they had just paid a lump sum of cash each month (which would mean more money spent).
2. It gives borrowers an incentive to manage their finances responsibly so as not to become over-extended on their credit card balances or other debts (therefore reducing their overall debt burden).
