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Why does my personal loan interest vary month to month?

Why does my personal loan interest vary month to month?

If you aren’t quite sure how interest is calculated on your personal loan, it may come as a surprise learning that monthly interest charges vary even on fixed rate loans. 

Each month when you make your personal loan repayment, you may notice that the proportion of the repayment that goes towards interest charges typically changes from one month to the next.

This can be particularly confusing if you have a fixed rate personal loan, as you might have expected that a fixed interest rate means fixed interest payments. But, there’s a fairly simple explanation as to why this is the case.

It comes down to two main factors:

1. Interest is calculated daily and typically charged monthly.

Since the number of days in a month can change from one to the next, interest charges may be slightly higher in the longer months and lower in the shorter months. 

2. Interest is charged on the principal balance. 

The reason you will likely see your monthly payable interest gradually decrease over the life of your loan is because it is charged as a percentage of the amount owing. As you make repayments on your loan, you pay down the principal balance, thus reducing the amount owing on the loan.

Take Claudia, for example. Claudia decides to take out a personal loan to help cover the cost of furnishing her new home. After comparing loans and applying for her preferred product, she gets approved for a $15,000 loan with a fixed interest rate of 8 per cent and a loan term of three years.

Claudia’s monthly repayments are estimated to be $470. To figure out roughly how much of her first monthly repayment will go towards interest, she divides her interest rate by 12 (as interest rates are annual figures), and then multiplies it by her loan’s principal amount of $15,000.

  • Her equation looks like this: (0.08/12) x 15,000 = 100

This means that of her $470 repayment, $100 would cover interest charges and the remaining $370 would go towards paying down the principal balance.

If Claudia wanted to find out how much interest she would pay on her second repayment, she could use the same equation but with the remaining principal balance. As she will have paid it down by $370, the principal in her second month would be $14,630

  • Her equation would look like this: (0.08/12) x 14,630 = 97.53

As you can see, the interest charged in her second month of loan repayments is slightly less than her first month, due to the reduced principal balance. Keep in mind that these are approximate figures only, to show how interest is charged and can vary from one month to the next.

Here’s how the interest charges on Claudia’s first six months of repayments might look:

 Principal balanceRepayment amount  Interest charged Principal paid Updated balance
 Month 1$15,000$470$100$370$14,630
 Month 2$14,630$470$97.53$372.47$14,257.53
 Month 3$14,257.53$470$95.05$374.95$13,882.58
 Month 4$13,882.58$470$92.55$377.45$13,505.13
 Month 5$13,505.13$470$90.03$379.97$13,125.16
 Month 6$13,125.16$470$87.50$382.50$12,742.66

Source: RateCity.com.au. Notes: This is an example only for the purpose of illustrating variations in interest.

How does interest vary on variable rate personal loans?

If your personal loan has a variable interest rate, the amount of interest you pay will not be fixed in advance and may instead be raised or lowered by your lender in accordance with the current economic conditions.

Calculating your interest charges on a variable rate personal loan can be trickier, but the calculations work much the same based on the interest rate at the time.

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Fact Checked -

This article was reviewed by Senior Journalist Tony Ibrahim before it was published as part of RateCity's Fact Check process.

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Learn more about personal loans

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

What is credit history?

Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

What is a secured bad credit personal loan?

A bad credit personal loan is 'secured' when the borrower offers up an asset, such as a car or jewellery, as collateral or security. If the borrower fails to repay the loan, the lender can then seize the asset to recoup its losses.

How do you get a bad credit personal loan?

You can get a bad credit personal loan by applying directly to a lender, by going through a mortgage broker or by using a comparison website like RateCity.

Can I include my spouse’s income on a personal loan?

If you apply for a joint personal loan with your spouse, you can include their income on the application. If approved, they then become jointly liable for the loan.

Both you and your spouse need to meet the eligibility criteria, such as income, age, and residency requirements, as stipulated by the lender. A joint loan could increase your chance of approval for a higher amount, as both borrowers’ incomes are assessed when determining borrowing capacity. 

What do single mothers need to apply for a personal loan?

Like other personal loan applicants, single mothers will likely need to provide a few documents to any potential lender, such as personal identification, bank statements (savings, loans, credit cards), proof of address, and proof of income (payslips, tax returns).

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

How long will I have bad credit?

Most negative events that appear on a person’s credit file will stay in their credit history for up to seven years.

You may be able to improve your credit score by correcting errors in your credit report, clearing outstanding debts, and maintaining good financial habits over time.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.

What documentation is needed for a self-employed personal loan?

Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.

While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Can I apply for a quick loan online?

While some lenders will require you to provide paperwork in person, many lenders will allow you to make an application for quick personal loan online. You’ll still need to provide information on your identity, income, and loan purpose in most cases.

Can I get a $4000 personal loan if I’m unemployed or on Centrelink?

Before most providers of personal loans or medium amount loans will approve an application, they’ll want to know you can afford the loan’s repayments on your current income without ending up in financial stress. Several lenders don’t count Centrelink benefits when assessing a borrower’s income for this purpose, so these borrowers may find it more difficult to be approved for a loan.

If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.