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Credit > Loans > Loan Information > Basics
Below are some basic definitions and tips that, hopefully, will help you on the way to becoming more knowledgeable about loans and credit:
Of course, in the real world it isn't so easy to calculate exactly how much interest it adds up to a year - this is because it is very unlikely your balance will stay the same over the course of the year. Even though interest rates are given as an annual rate, interest is usually calculated at least monthly at an amount that equates to the full APR over the course of the year.
This means that the interest compounds - in February you will be paying interest not only on the loan you took out at the start of January but also on the interest that was added to your account at the end of January.
However, at the same time as this is going on you should be making your monthly payments so your loan balance is going down. If you make your payments on time, you should gradually be paying less in interest and more off the balance each month.
Lets look at our £1000 loan with an APR of 7.5%. We'll assume that we've borrowed it for a year.
As you can see, you gradually pay more off the principal of the loan each month and less of your payment is going to interest.
This brings us onto our next topic, paying your loan off early:
Next: Making Extra Payments
Loan Basics
As with any kind of credit or financial service, you're more likely to choose the best loan for you if you understand all the technical language and jargon so you have a much better idea what you're getting into.Below are some basic definitions and tips that, hopefully, will help you on the way to becoming more knowledgeable about loans and credit:
Annual Percentage Rate (APR)
The term APR crops up in most kinds of credit, from mortgages to credit cards. It is also an important feature of personal loans. The APR is the amount of interest you pay on a loan for a year. For example, if you borrowed £1000 with an APR of 7.5% then you will pay £75 interest a year.Of course, in the real world it isn't so easy to calculate exactly how much interest it adds up to a year - this is because it is very unlikely your balance will stay the same over the course of the year. Even though interest rates are given as an annual rate, interest is usually calculated at least monthly at an amount that equates to the full APR over the course of the year.
This means that the interest compounds - in February you will be paying interest not only on the loan you took out at the start of January but also on the interest that was added to your account at the end of January.
However, at the same time as this is going on you should be making your monthly payments so your loan balance is going down. If you make your payments on time, you should gradually be paying less in interest and more off the balance each month.
Lets look at our £1000 loan with an APR of 7.5%. We'll assume that we've borrowed it for a year.
| Month | Payment | Principal | Interest | Balance |
| 1 | £86.76 | £80.51 | £6.25 | £919.49 |
| 2 | £86.76 | £81.01 | £5.75 | £838.48 |
| 3 | £86.76 | £81.52 | £5.24 | £756.97 |
| ... | ||||
| 12 | £86.76 | £86.22 | £0.54 | £0.00 |
As you can see, you gradually pay more off the principal of the loan each month and less of your payment is going to interest.
This brings us onto our next topic, paying your loan off early:
Next: Making Extra Payments
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