Clarification for calculating monthly payments

wulfhere

Hi, let's suppose I have a balance of £1000 at 6.8% APR for the life of the balance.

So that means, when I get my first month's bill, the minimum payment will be based on the sum of £1068, right?

Let's suppose I pay off £30, that means that the following month's payment will be based on the sum of £1038, right?

Tixy

If the APR is 6.8% then your balance won't go up by £68 for the first month (that is a whole year's worth of interest not 1 month)

But even if that was the balance the interest on the second month doesn't work quite like that as you will pay interest on the, say, £1068 from the date of the last statement to the date you paid your £30 and on £1038 from the date you paid the £30 to the date of the next statement.

What the minimum payment is varies for each card and is based on the terms & conditions, essentially they are usually the a percentage of the debt or a minimum amount.

dylanuk

The 6.8% APR is the annual rate - which means you need to do some maths before you can apply it as a percentage to your balance to work out an approximate interest cost. For example:

(APR - 1)/12 / 100 * YOUR BALANCE = MONTHLY INTEREST
(6.8 - 1)/12 /100 * £1000 = £4.83 (approximately)

The -1 is to remove compounding (this is charging interest on interest over a year)
The /12 is to divide by 12 months of the year
The /100 is to get a percentage

Hope this helps!

YorkshireBoy

To cloud matters further!...

It's first necessary to convert the APR back to an annual non-compounded (simple) rate. From here, 6.8% APR equates to 6.6% 'simple' interest.

Your monthly interest (on a static balance) is then calculated as:

balance x 6.6% / 365 x n

where n = no of days in the statement period

Using the above, the first month's interest, assuming January with 31 days, would be:

£1,000 x 6.6% / 365 x 31 = £5.61

Your minimum payment would then be 2.5% (or whatever) of £1,005.61