Interest Payments Explained

APR (Annual Percentage Rate) is the amount of interest you would pay over a full year, assuming no repayments. Consider the example below showing a loan of £100 at an interest rate of 1% per month. Interest is added until after 12 months the outstanding balance is £112.68, of which £12.68 is interest. This is an APR of 12.68%.

Month
New Balance
Interest Added
Balance Outstanding
£
£
£
1
100.00
1.00
101.00
2
101.00
1.01
102.01
3
102.01
1.02
103.03
4
103.03
1.03
104.06
5
104.06
1.04
105.10
6
105.10
1.05
106.15
7
106.15
1.06
107.21
8
107.21
1.07
108.29
9
108.29
1.08
109.37
10
109.37
1.09
110.46
11
110.46
1.10
111.57
12
111.57
1.12
112.68
Total Interest:
12.68
  

Now consider the same loan of £100, with the same monthly interest rate of 1%, but with regular monthly repayments. Again the interest is added each month, but calculated on a reducing balance. Let us assume the loan is made on the 1st January, so the first payment falls due on 1st February. There are 12 repayments in all, so the final payment is due on 1st January the following year. The necessary payments are calculated as £8.89 per month, with the final payment of £8.83

Date
Repayments
New Balance
Interest Added
Balance Outstanding
£
£
£
£
1-Jan
100.00
1.00
101.00
1-Feb
8.89
92.11
0.92
93.03
1-Mar
8.89
84.14
0.84
84.98
1-Apr
8.89
76.09
0.76
76.85
1-May
8.89
67.96
0.68
68.64
1-Jun
8.89
59.75
0.60
60.35
1-Jul
8.89
51.46
0.51
51.98
1-Aug
8.89
43.09
0.43
43.52
1-Sep
8.89
34.63
0.35
34.97
1-Oct
8.89
26.08
0.26
26.34
1-Nov
8.89
17.45
0.17
17.63
1-Dec
8.89
8.74
0.09
8.83
1-Jan
8.83
0.00
0.00
0.00
Totals:
106.62
6.62

In this case the total amount repaid is £106.62, of which interest is £6.62, or 6.62% of the original loan. This is an example of how loans operate within the the Credit Union.