What is interest on a loan? (We explain when renting a car)
Many people are afraid to take out loans because they do not understand how exactly the bank calculates overpayments. It seems that this is complex magic, accessible only to financiers. But in fact, everything is very simple!
Imagine you are renting a car. You pay the owner money for each day you use his car. Interest on a loan works exactly the same way! You rent someone else's money (the bank's money), and pay "rent" for each day that the money is in your possession.
Two main ways to pay a loan
Before we start counting, you need to know that banks offer two different payment plans. The final overpayment greatly depends on this.
- 🗓️ Annuity payments (the most frequent): You pay the bank absolutely every month the same amount (for example, strictly 10,000 rubles). Within this payment, interest first takes a large part, and only a small part goes to repay the debt itself. This is convenient for the budget, but the overpayment is greater.
- 📉 Differentiated payments: Your payment gets smaller and smaller every month. In the first month you pay a lot, and in the last month you pay very little. Here the debt itself is repaid evenly, so the final overpayment to the bank will be noticeably less.
Simple formula: how to find out the overpayment for one month?
Let's say you took out a loan and want to find out exactly how much money from your next payment the bank will pocket in the form of interest. There is a simple formula for this that any student with a calculator can handle:
Monthly interest = (Balance of debt × Annual rate) / 365 days × Number of days in the month
Illustrative example: buying a laptop
Let's look at everything using real numbers. Imagine that you bought a cool laptop. You borrowed 100,000 rubles from the bank at 20% per annum.
| Payment month | How do we calculate percentages? (Step by step) | How much will the bank take? |
|---|---|---|
| First month (let's say it has 30 days) | 1. Your debt: 100,000 rubles. 2. Divide 20% by 100 = 0.2 3. 100,000 × 0.2 = 20,000 (this is interest for the whole year) 4. 20,000 / 365 days = 54.79 rubles. (this is interest for 1 day!) 5. 54.79 × 30 days = 1643.7 rubles. | 1,643 rubles |
| Second month | You made a payment last month. Let's say your principal debt has decreased, and now you owe the bank not 100 thousand, but 95,000 rubles. We count according to the same scheme: (95,000 × 0.2) / 365 × 30 days = 1561.6 rubles. | 1,561 rubles (less already!) |
🔥 Main secret: How to legally deceive the bank and pay less?
The secret is called early repayment. Remember the main rule? Interest only accrues on the balance of the debt.
If you have 5,000 rubles available (given as a birthday gift or a bonus), immediately apply it towards early repayment of the loan. Your principal debt will decrease dramatically. This means that next month the bank will charge interest on a much smaller amount! This way you save a lot of money on overpayments.
Why is the real overpayment always greater? (Hidden Traps)
It often happens like this: you have calculated the interest using our simple formula, but the bank demands more money from you. Why is this happening? The point is in additional services that the bank quietly hides in the contract:
- 🛡️ Life and health insurance: Banks love to sell insurance. Sometimes it costs tens of thousands of rubles, and this amount is simply added to your debt!
- 📱 Paid SMS notifications: It seems that 99 rubles per month is a trifle. But over 5 years of the loan, a decent amount accrues.
- 💳 Transfer fees: If you top up your credit account from a card from another bank, you may be charged an additional percentage.
All this together is called FSC - Full Cost of Loan. By law, the bank is required to write the PSC at the very beginning of the agreement in a square frame. Always look at this figure, and not at the beautiful rate that is promised in the advertisement!
Why use an online calculator?
Calculating percentages by hand on a piece of paper is a great mental workout. But when a loan is taken out for 5 or 10 years (like a mortgage), you will have to schedule each month, taking into account leap years (where there are 366 days) and early repayments. This is very long and easy to make a mistake.