Interest Payments Explained
Below is an explanation of how interest rates work and what separates credit unions from other financial institutions. With many loans all the interest is added at the beginning, whereas with a credit union loan interest is only added each month on the outstanding balance. Also there is no penalty for paying off a loan early, you pay the balance which applies at that time.
APR (Annual Percentage Rate) is the rate we have to state by law and is the amount of interest you would pay over a full year, assuming you made no repayments. However, the folowing example shows that if you repay a credit union loan in accordance with the loan agreement the actual interest you pay is considerably less than the APR.
Consider a loan of £100 at an interest rate of 2% per month. The following tables show how APR is calculated, compared with the interest paid with a credit union loan. In both cases the loan is advanced on 1st January and interest is added on the last day of the month. However, in Table 1. there are no repayments, so the interest continues to mount and the outstanding balance at the year end is £126.82 of which £26.82 is interest, that is 26.82% interest (the APR).
In Table 2. the same loan is advanced, but a fixed monthly repayment is made. Each month the repayment is first taken off the outstanding balance before applying the 2% interest. After 12 payments the loan balance reduces to zero and the total amount paid in interest is £11.24, ie 11.24%.
|
Table
1. - APR illustration, ie loan without regular repayments
|
|||||
|
Date
|
Repayments
|
Balance
after repayment |
Interest
added
at month end |
New
Balance |
|
|
|
£
|
|
£
|
£
|
|
|
01-Jan
|
100.00
|
||||
|
31-Jan
|
0
|
100.00
|
2.00
|
102.00
|
|
|
28-Feb
|
0
|
102.00
|
2.04
|
104.04
|
|
|
31-Mar
|
0
|
104.04
|
2.08
|
106.12
|
|
|
30-Apr
|
0
|
106.12
|
2.12
|
108.24
|
|
|
31-May
|
0
|
108.24
|
2.16
|
110.41
|
|
|
30-Jun
|
0
|
110.41
|
2.21
|
112.62
|
|
|
31-Jul
|
0
|
112.62
|
2.25
|
114.87
|
|
|
31-Aug
|
0
|
114.87
|
2.30
|
117.17
|
|
|
30-Sep
|
0
|
117.17
|
2.34
|
119.51
|
|
|
31-Oct
|
0
|
119.51
|
2.39
|
121.90
|
|
|
30-Nov
|
0
|
121.90
|
2.44
|
124.34
|
|
|
31-Dec
|
0
|
124.34
|
2.49
|
126.82
|
|
|
Total
Payments:
|
£0.00
|
Toral
interest paid:
|
£26.82
|
||
|
Table
2. - Credit Union loan with regular repayments
|
|||||
|
Date
|
Repayments
|
Balance
after repayment
|
Interest
added
at month end |
New
Balance |
|
|
|
£
|
|
£
|
£
|
|
|
01-Jan
|
100.00
|
||||
|
31-Jan
|
9.27
|
90.73
|
1.81
|
92.54
|
|
|
28-Feb
|
9.27
|
83.27
|
1.67
|
84.94
|
|
|
31-Mar
|
9.27
|
75.67
|
1.51
|
77.18
|
|
|
30-Apr
|
9.27
|
67.91
|
1.36
|
69.27
|
|
|
31-May
|
9.27
|
60.00
|
1.20
|
61.20
|
|
|
30-Jun
|
9.27
|
51.93
|
1.04
|
52.97
|
|
|
31-Jul
|
9.27
|
43.70
|
0.87
|
44.57
|
|
|
31-Aug
|
9.27
|
35.30
|
0.71
|
36.01
|
|
|
30-Sep
|
9.27
|
26.74
|
0.53
|
27.28
|
|
|
31-Oct
|
9.27
|
18.01
|
0.36
|
18.37
|
|
|
30-Nov
|
9.27
|
9.10
|
0.18
|
9.27
|
|
|
31-Dec
|
9.27
|
0.00
|
0.00
|
0.00
|
|
|
Total
Payments:
|
£111.24
|
Tota
interest paid:
|
£11.24
|
||
Our actual rates of interest vary from time to time up to a maximum of 2% per month, so go to interest rates to see the rates which currently apply.