## Calculating Loan Payments

Loan payments can be difficult to calculate.

Generally, each month you pay interest for only that month – that’s 1/12th the yearly rate (APR = Annual Percentage Rate). You also only pay interest based on the loan’s current outstanding balance.

• Loan: Balance of 100 remaining at 12% APR
• Pay the loan off in 10 months.
• This month’s interest = 12% APR / 12 months = 1% x 100 = 1 in interest.
• Balance paid per month: 100 / 10 months = 10
• This Months payment = Balance payment (10) + Interest payment (1) = 11
• Remaining balance = 100 – 10 = 90

Since the balance is less each month, the interest also decreases:

• Loan: Balance of 90 remaining at 12% APR
• Pay the loan off in 9 months.
• This month’s interest = 12% APR / 12 months = 1% x 90 = 0.9 in interest.
• Balance paid per month: 100 / 10 months = 10
• This Months payment = Balance payment (10) + Interest payment (0.9) = 10.9
• Remaining balance = 90 – 10 = 80

And the next month:

• Loan: Balance of 80 remaining at 12% APR
• Pay the loan off in 8 months.
• This month’s interest = 12% APR / 12 months = 1% x 80 = 0.8 in interest.
• Balance paid per month: 100 / 10 months = 10
• This Months payment = Balance payment (10) + Interest payment (0.8) = 10.8
• Remaining balance = 80 – 10 = 70

These would be the 10 payments: 11, 10.9, 10.8, 10.7, 10.6, 10.5, 10.4, 10.3, 10.2, 10.1.  In total, those payments add up to 105.5.

The original 100 has been completely paid back, and an additional 5.5 has been paid in interest. This method works very well if you don’t mind making a different payment each month.

Lenders want you to make the same payment every month… with declining interest and increasing principal payments that equal the same amount each month and end up paying off all the interest with the remainder of the principal during the last identical payment. Setting up all these payments requires much more complicated math.

An amortization schedule lists the amounts which will be allocated to principal and interest within each equal payment over the life of the loan.

## Typical Interest Rates

Simple-interest loans are used for houses, cars, education, boats, airplanes and other large purchases. Once the loan is signed, the buyer starts using the item and begins paying for the rented money until the loan is repaid.

The rental rate for money is agreed to by the buyer and lender.

• A house loan (mortgage) may cost 5% APR
• A car loan may cost 7% APR when borrowing from a bank, although borrowing from the automotive manufacturers may offer much better rates
• A credit card company may charge you 20% APR on money rented for long periods of time.

House and Car loans are typically secured by the House or Car. When the buyer stops paying the car/house loan, a lender can take the car/house back – they usually try and satisfy the remaining balance of your loan by auctioning it to someone else. If an auction doesn’t bring in enough money to cover the remaining debt, the buyer may be required to pay any remaining difference.

The ability to take your items back and sell them makes the loan less risky. When a credit card company lends money it is much riskier because they can’t take groceries back – that’s why they have to charge much more interest.

## Layaway and Credit

Whats the difference between Layaway and buying something on Credit?

When using a Layaway program, the purchased item is not given to the customer until they have completely paid for the item. A credit check is not necessary and there are generally no finance charges, because money is not being borrowed.

Buying something using credit means you are borrowing the money. The most common example is a credit card. When using a credit card, money is borrowed from the credit card company (lender) and the seller gets paid the full amount immediately. Expect a credit check as a requirement before establishing a new line of credit – credit cards establish a maximum borrowed amount for your line of credit.

## Credit Measures Responsibility

Borrowers with poor credit ratings are sometimes people who can’t afford higher interest payments. At first this seems like an unfair system which favors the wealthy, but that’s not true.

Wealthy people have to earn their credit ratings through responsible use of borrowing. Everyone earns their credit rating this way, regardless of net worth. Some rich people are irresponsible about initiating and repaying their debts, earning them terrible credit ratings. Borrowers of very limited wealth can be very responsible when taking out loans and repaying them, earning them very good credit ratings.

Credit ratings don’t measure wealth at all, they measure financially responsible vs. irresponsible use of borrowing. Businesses have credit ratings of their own too, and they work the same way. A good credit rating means you will pay less interest when borrowing money.

Money-lending is a business. Can’t believe we have to say that, but we do… and it’s the simple truth.

Lenders need to be repaid more money than they lent out – or else there’s no point to being in that business. The original amount of money you borrow is called the ‘principal’ and the extra money you repay is called ‘interest’. Principal and Interest are important terms which you will see everywhere. If necessary, take some time to understand and remember what they mean.

Interest is where those businesses hope to make money, but only if the amount collected in interest exceeds the amount of principal that becomes uncollectible. You are expected to completely repay the principal amount, with the added amount of interest. Making money in business is not guaranteed, sometimes a bad deal is made and the business loses money. With lending, the interest collected must make up for the money lost when borrowers stop paying and deals go bad.

Lending money is a healthy business; banks are doing just fine.  Here’s an interesting fact – Financing a house using a fixed rate 30-year mortgage without additional payments … when the interest rate exceeds 5.3042% APR, the lender collects more than the price of the house through interest payments over the 30 year term.

## What is a Credit Bureau

As people borrow and repay money throughout their lives, they’re showing the world how financially responsible they are. Credit Bureaus are listening, and gathering data about payment histories – tracking people throughout their lives. That’s the goal anyway, but a credit bureau can’t magically track people.

Many lenders want use credit histories to make decisions about risk. To avoid the huge and complicated task of reporting information directly to each other, lenders report your payment history to the credit bureau. Lenders have a huge interest in getting an accurate picture of your risk. This is a situation that benefits both the lender and credit bureau.

Lenders report your payment history voluntarily to each other through credit bureaus, who compute your history of making payments on time and completely repaying loans on time. The computation is unique to each credit bureau and produces a number called a Credit Score. Your credit score is a single number – lenders purchase that number and use it to compare risk between individuals.

A credit bureau can make sure each lender is legitimate, but can’t verify the reported information is accurate. A bad credit rating due to inaccurate data reported to a credit bureaus (or inaccurate matching at the credit bureau) can have devastating effects on an individual. Each credit bureau has different ways for an individual to dispute bad data, and there are consumer-protection laws in place that try to help normal people force corrections when the credit bureaus are distributing bad data.

## Borrowing money is risky

Most people take 15-20 years, accumulating enough wealth to pay for a house. If people had to save enough money to pay for an entire house before getting started, they wouldn’t be able to buy one when they need it. That’s the need to borrow money when buying something really expensive – this borrowed money is a loan.

Due to life and circumstance, some people who borrow money will end up not being able to meet the financial obligations they take on – and failing to meet financial obligations is how to earn a bad credit rating.  When the borrower has a history of not being able to repay their loans (bad credit), it becomes a very risky decision to loan that person money.

Loaning money to people with bad credit is much riskier than loaning money to people with good credit. Loans to people with bad credit fail more often. To compensate for the higher rate of failure, a higher rate of interest is applied to people with bad credit.

That’s the simple beginning of a long and complex story about credit ratings and interest rates.

## Mobile App Support

• Why can’t I edit the Total Value field?
• Press the opposite-arrows button to swap the Monthly Payment field to the top.  Once you do this, all numbers entered will calculate the top number.
• What should I put in each of the fields on the main page?
• Where can I find the amortization schedule for my loan?
• Once you enter enough information on the front page, there will be a big green number on that page.  Press the “report” button, and you’ll see a page with a graph.  Touch the graph and run your finger across the graph to see each amortized payment amount.
• The amortized payment amounts don’t match my lender’s statement exactly – are they wrong?
• Lenders can compound interest more/less often, and finding that information is not a beginner’s task. Also, months have different numbers of days. Loan Sense doesn’t have that information and can’t perform the exact same calculations as your lender – ours our very close each month and the totals will be correct overall.
• Screenshots show the 2-week method – how do I get there?
• That functionality can’t universally be applied to leases, and has very limited value on short-term loans so it’s not provided in either of those cases. On the Report page (with the graph) touch the “Want to save some money?” link and some extra fields and another graph will appear.
• How do I see the savings from extra payments?
• That functionality can’t universally be applied to leases so it’s not provided for those loans. On the Report page, immediately under the graph, there’s an Extra Payments field – touch the field that says ‘None’ until your extra payment frequency is correct [None / Once / Monthly / Yearly].
• From the video on the About page – did your coworker keep paying \$915 for his car?
• Yes, until he sold it for a more expensive one. Now \$950.
• I’m leasing and the dealer is only giving me a “Money Factor” instead of APR – where do I put that?
• Put that number in the APR field. The App will convert it for you. While you’re in that field, touch the “…more about this??” link and we’ll show you a calculator to do the conversion between APR and Money Factor.