A little help needed, trying to understand something.

GST20

Hello everyone

I am a little confused and would like if possible someone to explain something to me.

Take a of £10 000 at 10% over five years. The total repayment is 12720 according to the table. What I want to know is where am I going wrong. When I try to work out the total interest on the loan I get a differing answer to the one in the table.

Here is what I have been doing.

Year 1 10000 x 10% = 11000
Year 2 11000 x 10% = 12100
Year 3 12100 x 10% = 13310

As you can see its already over the amount shown in the table. I know I havent been taking into account the fact that each year the balance in being paid off but by how much each month?

GST20

Sorry mate still a little confused so its not really 10% or what...

GST20

oh gotcha so if for example its over 10 years aftr he first year i would have paid a 10th or interest on the remaining 9 tenths????

GST20

If its only half the apr, why dont they just say 5% interest because in effect hats what ur paying.

CLAPTON

The point is there is a difference between an interest rate (APR) which is a well defined calculation and the total actual interest paid in particular circumstances.
So for any given APR the actual interest paid depends upon the amount and length of loan, whether you make additional payments or terminate the loan early.
If you like to work out the total interest payable and divide by the loan amount then than's fine and most credit agreements give you those figures but this isn't the APR.

In fact quite a few dodgy car dealers do use the so called 'flat rate ' interest rate (similar to what you are saying) because it looks a lot cheaper than it really is.. lots of people complain about it too.

The nice thing about using the APR is you can use it to compare different loans from different suppliers.