For example, if you had a loan of $100,000 at 7% and paid it back at $899 a month, the loan would be paid off in 15 years (100 x 8.99).
The factors illustrate the way compound interest works. If you notice that relatively small increases in repayments will reduce the loan from 30 years to 20 years, but it takes a large increase in repayments to decrease the loan from 10 to 5 years.
As the term of the loan lengthens: The effect of the interest rate results in the amount of interest you pay, which increases exponentially. Paying a loan back at $20 per $1,000 borrowed will pay the loan off in 5 years. Interest rates have very little effect. Paying less than $8 per month increases the loan term to over 20 years. Now interest rates start playing a major factor in the amount of interest that has to be repaid.
Paying your loan back at $12 per $1,000 a month, if possible, will reduce the term to approximately 10 years and take interest rates out of the equation as the term of the loan will be largely unaffected by rate fluctuations.
If you can’t do $12 per $1,000 try to pay back at least $8 per $1,000. As you can see from the above table this will keep your loan to around 20 years.
If you would like to discuss or reassess your loan options our lending team can help!
What you need to know
This information is provided by Invest Blue Limited (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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