Your monthly repayment consists of two components.
Component 1: This is the principal part of the payment. The principal is the portion of the loan that directly reduces the original amount you borrow.
Component 2: his portion pays of the interest that has been added to your loan.
The ratio is which these components are paid off will vary with the life of the loan. At the start your $250 monthly repayment will be reducing almost all (if not 100%) of the interest applied to the loan. So, theoretically you could take a loan out, pay the first few repayments then try and cancel the the loan but still have to pay the full amount you borrowed.
As the loan period progresses the percentage of your monthly payment that pays off the original amount you borrowed (the principal) will increase. It is worked like this so that the banks get most of their interest first and if you cancel early you are still left with paying out the principal.
Say you had a $10,000 loan
Interest is $2,500
Total payable $12,500
Repayments are $250/monthThe large majority of your monthly payments at the start of the loan go to decreasing the $2,500 portion of the loan. As the loan continues (and the interest is closer to being paid off) a larger portion of your $250 monthly payments is used to pay off the $10,000 portion of the loan.
You need to ensure that when making extra payments the money is paying off the $10,000 portion and not the $2500 interest portion.I hope this makes sense, good luck!
*All values are used are for demonstration purposes only*
Do you need a car AND a bike, especially while you're trying to get out of the debt trap ?
What's the bike worth to sell ? Coz if you sell it and pay the proceeds off the debt, especially the highest, they'll be paying YOU the 16.5% in effect. Need to establish priorities when eradicating debt.
Definately a good idea to consolidate with a cheaper loan and your $750 fortnightly is over $19K p.a. which should just about clean it up – do that with a financer overlooking and knowing what you're doing and you'll have a new fan and a good relationship to move forward into investing with.Go for it – and good onya serving in the Navy, we appreciate what you do. And next time you're sailing around the top end, would you mind just checking the fence and closing the gate mate.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Wyeth,
Thanks for doing a better job of explaining the way loans work than what I did!!
cheers
Sonya
Thanks for explaining how the loans work.
I've got steve's 0 to 260+ in 7 years book now and am currently about half way through, i've got a DHA property investing seminar on 24th feb, Steve's seminar in sydney on the 24th march. So the educating is going in the right direction.
However i think i may have taken a step backwards with the paying off my debts. I'm not sure if anyone knows about banks lending criteria?I saw the add for the citibank gold credit card, offering 2.9% for 12months. I was going to use this to consolidate my credit card and personal loans, saving myself ~$900 on interest. unfortuneatley i was declined.
During the application interview over the phone. I was asked how much i earned which is about $76000, after tax and super and repayments on a intrest free loan through the navy, ~$53000.
$2029 p/fnight.
expenses. rent $500
debts $750.
minimum repayents $330i told the person on the phone that i was paying, $1500 a month off of my loans. should i of just said that i was paying off of the minmium repayments. i told the guy on the phone that i was paying off more then double the repayments. did i shoot myself in getting approved for the credit card, or could i have a bad credit rating? i thought i would of been ok with my figures considering the loans i'm paying off would be going across to the citibank credit card?
will i have a 'black mark' against me now that the credit card was declined. should i try and apply for another credit card with the low interest rate for a 12month period, i've seen a few with 1.99%-4.9% for 12 months. compared to the best personal loan i could find 12.9%?
should i apply for the citibank gold card again but only use the minimum repayments when asked for my expenses?thanks in advance.
Todd Giles
Hi Todd, if you want to know what your credit rating is you can request your credit rating.You will have to provide specific details such as DOB, address etc as well as proof of ID then you can either pay for a report via email or wait for about ten days and they will post it out for free. I can't think of the address, but you can probavbly google the site. cheers Sonya
Just thought i would give everyone an update as to where i'm at with getting rid of these debts. I'm also yet to do my tax return for last year.
what i started with. what i have now.
27/01/2010 06/04/2010$17100 $12354
$8200 @ 10.5% $7700 @ 10.5%
$6300 @ 16.15% $4066 @ 16.15%
$1000 @ 13.3% $588 @ 13.3%
$1600 @ 11.99%i'm happy with the progress i'm making and it was good to get rid of one of the loans this afternoon, although paying the ~$1200 off of the 16.15% loan would of been better financially it feels better only having 3 debts instead of 4 now
the loan that i payed off was done so 23 months ahead of schedule and because i had insurance the bank actually pays me $19.38
Well done on clearing so much debt!!
One thing that is worth considering, is that banks need evidence of “genuine” savings for your deposit, and the more you have saved the better. They want to see this over a minimum 6 month period. I assume you’re going to put the $750 f/n away as savings once you’re finished with these debts, which should be in around 6-8 months? so if you’re planning to save for another 6-12 months or more once you’ve cleared debt, then all is good. but just in case you’re getting gifted some funds or hoping to buy something sooner, you may consider starting a savings account now and putting away $50 f/n or something. its not much, but does show a savings pattern.
Did you confirm that the high interest loan is allowed to be paid off early? some of those lenders have penalties for early payouts, so make sure you are aware of these. if there are big penalties it could be better to pay off the other loans quicker. This is along the lines of what Sonya was saying earlier.
Congrats again on working hard at clearing that debt. you’ll knock off loan #3 fairly soon too and then be down to 2. just make sure you don’t slip into these habits again and build up more debt. The only debt that’s really good for you is against appreciating assets/investments.
none of the loans have any penalties for being payed out earlier, and yeah my plan is to put the $750 f/n towards savings once all the debts are gone, possibly more as i have another interest free loan where $155 comes out which is repayed in early december. i also have $50 f/n going into another account which i reguarily forget about lol which i use as my savings.
Like you said i'm not looking at purchasing anything sooner then atleast probably july/august next year as i simply won't have the funds available.
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