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How
does the credit union calculate loan interest? How much of
each loan payment is applied to principal and how much to
interest?
All
credit union loans are closed-end loans (as opposed to open-end
credit, such as a credit card). All loan interest is calculated
utilizing the "Simple Interest Method", which
is the least expensive way to borrow money since you only
pay interest on the unpaid balance of the loan for the period
of time the money is outstanding. Lenders such as credit unions
who charge simple interest calculate it on the unpaid principal
when each payment is made. The payment amount is first applied
to any interest due (plus late charges if any), and the remaining
amount is then applied to reduce the loan principal balance.
For
example, the method for figuring interest due for any monthly
loan payment is as follows:
|
| Interest
due = Unpaid Loan Balance X |
| ( |
Interest
Rate (APR)
365
Days
|
X
|
Number
of Calendar Days Since
Date of Last Payment |
) |
| Consider
a one-year $1,000 loan granted at 12% (0.12) APR (Annual Percentage
Rate), with scheduled payment of $88.85 due on the first of
each month. |
|
1st
payment: Unpaid Balance $1,000 X
|
| ( |
0.12
(APR)
365
Days
|
X
31 Days |
)
|
=
$10.19 Interest
|
|
2nd
payment: Unpaid Balance $921.34 X
|
| ( |
0.12
(APR)
365
Days
|
X
30 Days |
)
|
=
$9.09 Interest
|
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If
you make your payments as scheduled on each due date, you
will notice that as the loan amortizes you - the borrower
- will pay most of your total interest early in the loan
term because that's when you have the use of most of the
money you borrowed. The portion of your monthly payments
applied to loan principal increases as the interest portion
declines through the 12th and final payment, as the following
partial amortization schedule shows.
|
| Payment
no. |
Unpaid
balance |
Payment
size |
Interest
portion |
Principal
portion |
|
1
|
$1,000.00 |
$88.85 |
$10.19 |
$78.66 |
|
2
|
921.34 |
88.85 |
9.09 |
79.76 |
|
3
|
841.58 |
88.85 |
8.58 |
80.27 |
|
4
|
761.31 |
88.85 |
7.76 |
81.09 |
|
5
|
680.22 |
88.85 |
6.71 |
82.14 |
| This
method of interest calculation on loans is the fairest method
and the least expensive way to borrow. It encourages borrowers
to make their payments on the scheduled due dates of their
loan. In addition, the credit union does not discourage
members from making extra payments on their loans or paying
their loans off early, as we have no prepayment penalties
on any credit union loan.
Your
periodic statement of account and loan activity should be
thoroughly reviewed, and if you ever have any questions,
feel free to contact the credit union office staff for assistance.
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2000-2006 LBCEFCU ·
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