Answer:
hese loans are called amortizing loans - which means that the mathematical whizzes at your bank have worked them out so that you pay a set amount each month and at the end of your loan term, you’ll have paid off both interest and principal.
You can use an interest calculator to work out how much interest you’re paying all up, or, if you’d rather do it by hand, here’s how:
1. Divide your interest rate by the number of payments you’ll make in the year (interest rates are expressed annually). So, for example, if you’re making monthly payments, divide by 12.
2. Multiply it by the balance of your loan, which for the first payment, will be your whole principal amount.
This gives you the amount of interest you pay the first month.
So for example, on a personal loan of $30,000 over a period of 6 years at 8.40% p.a. and making monthly repayments:
Because you’ve now begun to pay off your principal, to work out the interest you pay in the following months, you need to first calculate your new balance. So:
1. Minus the interest you just calculated from the amount you repaid. This gives you the amount that you have paid off the loan principal.
2. Take this amount away from the original principal to find the new balance of your loan.
To work out ongoing interest payments, the easiest way is to break it up into a table. So using the above example, your calculations might look like this:
Month Starting balance Repayment Interest paid Principal paid New balance
1 $30,000 $532 $210 $322 $29,678
2 $29,678 $532 $207.75 $324.25 $29,353.75
3 $29,353.75 $532 $205.48 $326.52 $29,027.23
4 $29,027.23 $532 $203.19 $328.81 $28,698.42
5 $28,698.42 $532 $200.89 $331.11 $28,367.31
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