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Forums - General Discussion - I need help understanding "interest rates"!

ecurbj on 10 September 2008
GooseGaws said:
Say you had a credit card with a 10% APR (annual percentage rate). You make a purchase for $1000. Most cards will have a minimum payment of something like 3% of you total balance or $10, whichever is higher. When they calculate interest on that $1000 the next month, the value is approximately 1/12 of the APR (in this case, 0.83333333...%). So your total balance will be 1083.33. If you only make the minimum payment of 3% ($32.50), your balance will now be $1050.83. So when the next month rolls around and interest is calculated again, your new balance will be $1138.40. Make sense?

Now, I'm confused...I need someone to slow it down a little more. Those were some huge numbers you presented! And I'm like wow right now...

 



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TheRealMafoo on 11 September 2008
ecurbj said:
GooseGaws said:
Say you had a credit card with a 10% APR (annual percentage rate). You make a purchase for $1000. Most cards will have a minimum payment of something like 3% of you total balance or $10, whichever is higher. When they calculate interest on that $1000 the next month, the value is approximately 1/12 of the APR (in this case, 0.83333333...%). So your total balance will be 1083.33. If you only make the minimum payment of 3% ($32.50), your balance will now be $1050.83. So when the next month rolls around and interest is calculated again, your new balance will be $1138.40. Make sense?

Now, I'm confused...I need someone to slow it down a little more. Those were some huge numbers you presented! And I'm like wow right now...

 

 

You. you are correct with the example I gave (well, Zexen gave). The example he gave however, is really only use in cases like if it really was your parents, and it's called simple interest.

Compound interest is what a real institution will do, and this is what GooseGaws described. In the above, you get charged more up front then you do later on. You paid 83.33 to have that 1000 away from the bank for a month. But if you pay $110, you will pay that 83.33 in interest, and 26.67 towards your loan.

So when they do the .83333333 thing the next month, it will only be on $973.33, so the interest you accrued will be $81.11. this means more of your $110 payment will go to the loan.

I think even if you are not seeing the entire picture, you can see how this really sucks compared to the simple interest idea. This is why you never want to get into debt ;)



GooseGaws on 11 September 2008

If you're talking about a loan that is scheduled to be paid out over a specific period of time, the structure changes. I'll try to simplify my credit card explanation, though (I noticed my numbers were off, as well).

Let's say the credit card had a 12% APR; this would come out to approximately 1% per month. When you make a purchase with the card, interest will start to accumulate in the following months. So for a $1000 purchase, the 1% interest will add $10 to your balance after the first interest-bearing month ($1000 x 0.01 = $10). Your balance is now $1010. You will now be required to make at least the minimum payment for that month, which we'll say is 3% of the balance. This means that your minimum payment is $30.30 ($1010 x 0.03 = $30.30). If you make just the minimum payment, this will leave your current balance at $979.70. The next month, interest will be calculated again at approximately 1%, adding another $9.80 to your balance ($979.70 x 0.01 = ~$9.80), now making it $989.50. Your minimum payment is once again due, which will now be $29.69 ($989.50 x 0.03 = ~$29.69). So far in these two months, you have paid $19.80 in interest on your initial purchase.



Hates Nomura.

Tagged: GooseGaws - <--- Has better taste in games than you.
Bobwilliams on 16 September 2008

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Bobwilliams

 

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