Calculation confusion.

grassgirl

Sorry I’m a bit confused I wonder if you could help me.

I had a loan for £2000. Over 2 years.
I understood the interest to be 99.9%.
Total charge of £1804.

I have paid 6 months at 158.50 so £951.

To settle they need additional £1894.83, so totalling £2845.83, with interest being paid of £845.

I won’t have had the loan for a year, so why have I had to pay (nearly) half of the interest of 1804?

The interest should be closer to 1/4 or 1/3 of the 1804 that I would be charged if I kept it for the lifetime, as I’ve only had it for 6 months..?

What am I doing wrong here, I feel very confused.

Note: I know it the % is high but I had no other option and knew I’d be paying it back in full within 6 to 7 months, however I’d figured on the interest being £475.50, so a difference of £369.50, which I just can’t get my head around...maybe I just need more sleep :huh:

grassgirl

So far, I’ve been paying about 18/month off my loan, and over £140 interest.

Thanks in advance for any maths ability shared

DrEskimo

grassgirl wrote: »

Sorry I’m a bit confused I wonder if you could help me.

I had a loan for £2000. Over 2 years.
I understood the interest to be 99.9%.
Total charge of £1804.

I have paid 6 months at 158.50 so £951.

To settle they need additional £1894.83, so totalling £2845.83, with interest being paid of £845.

I won’t have had the loan for a year, so why have I had to pay (nearly) half of the interest of 1804?

The interest should be closer to 1/4 or 1/3 of the 1804 that I would be charged if I kept it for the lifetime, as I’ve only had it for 6 months..?

What am I doing wrong here, I feel very confused.

Note: I know it the % is high but I had no other option and knew I’d be paying it back in full within 6 to 7 months, however I’d figured on the interest being £475.50, so a difference of £369.50, which I just can’t get my head around...maybe I just need more sleep :huh:

Sounds right. You need to remember that the total payable interest on a loan is not spread evenly over the term. It's calculated on the capital each month. The capital at the beginning is £2,000, so the interest is a % of this amount. Since the monthly figure is fixed, this means a greater proportion of the monthly cost is interest, with only a small proportion paying off the capital. The next month the capital is reduced slightly, so the proportion going towards interest is reduced slightly, meaning slightly more of your monthly cost is going towards capital. This then continues across the term.

Slowly but surely, the capital decreases and as the loan nears the end of the term the proportion of your payment going towards interest will reduce. It will look something like this:


Date Regular Payment Overpayment Capital Interest Balance
Month 1 | 31/01/2020 £158.50 £0.00 £39.67 £118.83 £1,960.33
Month 2 | 02/03/2020 £158.50 £0.00 £42.02 £116.48 £1,918.31
Month 3 | 02/04/2020 £158.50 £0.00 £44.52 £113.98 £1,873.79
Month 4 | 02/05/2020 £158.50 £0.00 £47.17 £111.33 £1,826.62
Month 5 | 02/06/2020 £158.50 £0.00 £49.97 £108.53 £1,776.65
Month 6 | 02/07/2020 £158.50 £0.00 £52.94 £105.56 £1,723.71
Month 7 | 02/08/2020 £158.50 £0.00 £56.08 £102.42 £1,667.63
Month 8 | 02/09/2020 £158.50 £0.00 £59.41 £99.09 £1,608.22
Month 9 | 02/10/2020 £158.50 £0.00 £62.94 £95.56 £1,545.28
Month 10 | 02/11/2020 £158.50 £0.00 £66.68 £91.82 £1,478.60
Month 11 | 02/12/2020 £158.50 £0.00 £70.65 £87.85 £1,407.95
Month 12 | 02/01/2021 £158.50 £0.00 £74.84 £83.66 £1,333.11
Month 13 | 02/02/2021 £158.50 £0.00 £79.29 £79.21 £1,253.82
Month 14 | 02/03/2021 £158.50 £0.00 £84.00 £74.50 £1,169.82
Month 15 | 02/04/2021 £158.50 £0.00 £88.99 £69.51 £1,080.83
Month 16 | 02/05/2021 £158.50 £0.00 £94.28 £64.22 £986.55
Month 17 | 02/06/2021 £158.50 £0.00 £99.88 £58.62 £886.67
Month 18 | 02/07/2021 £158.50 £0.00 £105.82 £52.68 £780.85
Month 19 | 02/08/2021 £158.50 £0.00 £112.10 £46.40 £668.75
Month 20 | 02/09/2021 £158.50 £0.00 £118.77 £39.73 £549.98
Month 21 | 02/10/2021 £158.50 £0.00 £125.82 £32.68 £424.16
Month 22 | 02/11/2021 £158.50 £0.00 £133.30 £25.20 £290.86
Month 23 | 02/12/2021 £158.50 £0.00 £141.22 £17.28 £149.64
Month 24 | 02/01/2022 £158.53 £0.00 £149.64 £8.89 £0.00

[Deleted User]

That all looks right. Interest is charged daily on your current balance, so is much higher at the start.

Your early payments pay off much less capital than your later ones.

The sooner you clear it, the more interest you'll save.

MallyGirl

there may also be a penalty of 2 months interest for paying back early - this will be in the T&Cs

foxy-stoat

The first months interest was around £153 - so you hardly paid anything off the capital of the loan.

The probably charged you 2 months interest on the early settlement figure.

grassgirl

Very helpful, thank you very much.

DrEskimo wrote: »

Sounds right. You need to remember that the total payable interest on a loan is not spread evenly over the term. It's calculated on the capital each month. The capital at the beginning is £2,000, so the interest is a % of this amount. Since the monthly figure is fixed, this means a greater proportion of the monthly cost is interest, with only a small proportion paying off the capital. The next month the capital is reduced slightly, so the proportion going towards interest is reduced slightly, meaning slightly more of your monthly cost is going towards capital. This then continues across the term.

Slowly but surely, the capital decreases and as the loan nears the end of the term the proportion of your payment going towards interest will reduce. It will look something like this:


Date Regular Payment Overpayment Capital Interest Balance
Month 1 | 31/01/2020 £158.50 £0.00 £39.67 £118.83 £1,960.33
Month 2 | 02/03/2020 £158.50 £0.00 £42.02 £116.48 £1,918.31
Month 3 | 02/04/2020 £158.50 £0.00 £44.52 £113.98 £1,873.79
Month 4 | 02/05/2020 £158.50 £0.00 £47.17 £111.33 £1,826.62
Month 5 | 02/06/2020 £158.50 £0.00 £49.97 £108.53 £1,776.65
Month 6 | 02/07/2020 £158.50 £0.00 £52.94 £105.56 £1,723.71
Month 7 | 02/08/2020 £158.50 £0.00 £56.08 £102.42 £1,667.63
Month 8 | 02/09/2020 £158.50 £0.00 £59.41 £99.09 £1,608.22
Month 9 | 02/10/2020 £158.50 £0.00 £62.94 £95.56 £1,545.28
Month 10 | 02/11/2020 £158.50 £0.00 £66.68 £91.82 £1,478.60
Month 11 | 02/12/2020 £158.50 £0.00 £70.65 £87.85 £1,407.95
Month 12 | 02/01/2021 £158.50 £0.00 £74.84 £83.66 £1,333.11
Month 13 | 02/02/2021 £158.50 £0.00 £79.29 £79.21 £1,253.82
Month 14 | 02/03/2021 £158.50 £0.00 £84.00 £74.50 £1,169.82
Month 15 | 02/04/2021 £158.50 £0.00 £88.99 £69.51 £1,080.83
Month 16 | 02/05/2021 £158.50 £0.00 £94.28 £64.22 £986.55
Month 17 | 02/06/2021 £158.50 £0.00 £99.88 £58.62 £886.67
Month 18 | 02/07/2021 £158.50 £0.00 £105.82 £52.68 £780.85
Month 19 | 02/08/2021 £158.50 £0.00 £112.10 £46.40 £668.75
Month 20 | 02/09/2021 £158.50 £0.00 £118.77 £39.73 £549.98
Month 21 | 02/10/2021 £158.50 £0.00 £125.82 £32.68 £424.16
Month 22 | 02/11/2021 £158.50 £0.00 £133.30 £25.20 £290.86
Month 23 | 02/12/2021 £158.50 £0.00 £141.22 £17.28 £149.64
Month 24 | 02/01/2022 £158.53 £0.00 £149.64 £8.89 £0.00

foxy-stoat

juansan wrote: »

Why last payment is £158.53 and not £158.50? Is only 3 cents, but I don't understand...

Not even 3 cents, its 3 pence.

You dont need to understand, it just is.

Doubt it will help the OP much though.