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What is the Interest in a Loan and How Does it Work? Fully Amortizing and Interest-Only Loans

 When applying for a loan, you agree on paying the interest but, many people don’t understand what that means and, how it works. That’s precisely what I’ll explain in this article. Apart from that, I’ll provide information about fully amortizing and Interest-only loans so, by the end of the reading, you’ll feel ready to apply.

I’ll start explaining what is known as the interest.

    When you take out a loan, the lender charges you a percentage of the amount borrowed. This percentage is what they call “interest” and, it’s paid monthly. Borrowers pay for it when they cancel the installments, which means, the interest rate is inside the monthly payments.

Now I’ve already explained what the interest is, we can go on expanding on the topic.

What does it mean when a loan is Fully Amortizing?

    This term makes reference to the time stipulated to return the money borrowed and the method you choose. Fully amortizing is when you alternate the interest you have to pay with the principal you have to give back. This is how: with the first installments the borrower pays off mostly the interest rather than the capital and, towards the end of the term, this is turned over; the highest percentage is dedicated to the capital and, the smallest to the interest. As a result, providing that the borrower pays the installments properly, the loan will be paid off by the end of the term agreed.

    Quite the opposite happens with Interest-Only Loans, in which the client starts repaying only the interest during the first installments and then, there are three alternatives to choose from:

            1. To pay what’s left, meaning, the principal.

            2. To rearrange on a new Interest-Only loan.

            3. To turn the loan into a Fully Amortizing Loan. 

Minimum Monthly Payment: how does it work?

    After signing the contract, it is compulsory for the borrower to pay the installment on time. All the same, there’s also what is known as “Minimum Monthly Payment”, which refers to the lowest sum of money the client is forced to deposit per month. This amount is settled by the lender in accordance to the loan size and, the monthly payment amount so; when you discuss your terms, make sure to ask about this detail.

Why is it better to pay more than the Minimum Payment?

Although this minimum payment can be a life saving tool, it is always advisable to try to avoid it as much as possible. Following, I’ll expand on some features worth pointing out about this:

  • If borrowers make use of the minimum payment many times, they end up gathering a high amount on interest and extra fees. If you steer clear of this kind of payment, you can save money.

  • Even though the lending company assures you they want to help you cancel the loan soon, this may not be the case. As they make profit out of your interest, the longer you take to repay the money, the more profit they get, which translates into more fees charged to your loan.

  • As you know, to be approved for a loan, borrowers must have acceptable credit history. It is important you understand that every minimum payments you make lowers your credit history making it more difficult for you to take out a loan in a future.

  • Remember that minimum payments will only stretch on your term making a never-ending nightmare until you finally get free of debt.

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I think it’s clear now; this special feature must be used on specific situations when you have no other alternative in order to stay away from unnecessary risk.

Having everything in mind, is it a good idea to get a Personal Loan?

    On one side, a Personal Loan may help you get what you need but, on the other, there are certain aspects that may get on the way of achieving your goal. So please, bear in mind the following points before deciding.

    To start, if you have a permanent job, you have more chances to be eligible for a loan and, to repay it properly. Besides, be sure to have enough income to afford the payments but, at the same time, have enough to cover your regular daily routine. Second, make sure the company you choose is reliable and, works for you. Third, take into account the amount of money you need and the purpose of the loan so you can make a smart decision when choosing the type of loan. Remember, there are different types, short or long term loans, for instance. Fourth, analyse the time you want to spend repaying the credit and, calculate the interest rate the company will charge you to know if you can afford the cost of the loan.

How do you calculate monthly interest on a Personal Loan?

Of course, calculating the interest is not something everybody knows how to do it. However, as difficult as may sound, calculating the monthly interest is a piece of cake once you understand the process. Keep on reading to find out the steps you must follow:

        1- Start by converting the annual rate, which is shown on percentage, to decimals. This is accomplished by dividing it by a hundred. For example, on a 15% annual interest, we would stay on 0.15.

        2- Then, as the year calendar has 12 months, you must divide the annual rate by 12. In this case, the result is .0125.

        3 - Following, we’ll multiply this interest per month on $100. The product, in this case is $12, 5.

        4 – Finally, you have to multiply by 100 the monthly rate to turn the decimal format to percentage again, which leaves us on a 12.5%.

At last, I’ll list some entities you can have in mind in South Africa:

+ Absa loans.

+ African Bank.

+ Cash Converters.

+ Finbond.

+ FNB, First National Bank.

    After having clarified these doubts, I’m sure you are now a little closer to your perfect deal. In case you have any specific query, please don’t hesitate on leaving your question and, we’ll answer right away.

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Questions and answers

What’s the quote for Cash Converters?

As Cash Converters is a short term loan provider, quotes are around R 5000. All the same, take into account they can vary depending on your credit history or, the time when you apply for the loan.

Can I decide on the amount deposited?

You can apply for the loan amount you need but, the company may suggest lowering it if they think you don’t qualify for that amount.

Are loan fees intangible assets?

Yes, intangible assets refer to those items for which money was paid even though they can’t be touched or seen. In this category, we can also mention Patents and Trademarks for instance.

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Calculating the interest rate is paramount to understand the total cost of the loan.

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African Bank is the most reliable lending company.

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