How interest is calculated

The banks base their calculations of the interest you owe on the outstanding loan amount for each day the loan is held.

Say, for example, that you take out a loan of R100 000 at 15.5 percent interest over 20 years. The interest you owe accumulates at R42.46 a day (R100 000 ´ 15.5 percent Ö 365). At the end of each month, the total interest of about R1 300 is added to your debt (that is, capitalised monthly). Thus your monthly repayments on R100 000 are about R1 350, which covers the interest payment plus a small amount of the capital.

In the first few years of repaying a loan, you hardly pay off any of the capital, because most of your monthly repayments go towards paying the interest. But as you reduce the capital, the interest portion of your loan decreases and a greater amount of the capital is repaid with each instalment.

For example, on the same R100 000 loan, after the first year you would have paid nearly R15 500, but only R800 of this would have been used to pay off the capital sum borrowed. After 20 years, you would have repaid the R100 000 loan, but also nearly R225 000 in interest.

This is why it pays to put extra money into your home loan whenever you can. Even paying a small amount over and above your required monthly repayment makes a big difference.

For instance, if you put only R20 more a month towards the R100 000 loan mentioned above, you will repay the loan in just over 18 years, instead of 20, and save yourself more than R23 000 in interest.

http://persfin.co.za
May 31, 2003
By Charlene Clayton

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