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 balance Repayment 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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Learn more about personal loans

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

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.

How long does it take to get a $5000 loan?

Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford its loans on your income.

Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.

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.

How long are $3000 loans?

Medium amount loans can be repaid between 16 days and 2 years. Many personal loans have terms between 1 year and 5 years, though some are as short as 6 months while others last for 10 years.

Generally, the shorter a loan’s term, the more expensive your regular repayments may be, but the less total interest you’ll pay. Loans with longer terms mean more affordable repayments, but more interest charges over the full term.

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.

When was comprehensive credit reporting introduced?

Comprehensive credit reporting was introduced to make credit reports fairer and more accurate. Under the previous system, credit providers only saw negative information about potential borrowers. Now, they're able to see both positive and negative information, which means that credit providers can see if a borrower’s negative credit behaviour is consistent or a mere one-off.

What is a credit rating/score?

Your credit rating or credit score is a number that summarises how credit-worthy you are based on your credit history.

The lower your score, the more likely you are to be denied a loan or forced to pay a higher interest rate.

What causes bad credit ratings/scores?

Failing to repay loans and bills will damage your credit score. So will falling behind on your repayments. Your credit score will also suffer if you apply for credit too often or have credit applications rejected.

Can I get a self-employed personal loan with bad credit?

It may be much more difficult for a self-employed borrower to successfully apply for a personal loan if they also have bad credit. Many lenders already consider self-employed borrowers to be riskier than those in full-time employment, so some self-employed personal loans require borrowers to have excellent credit.

If you’re a self-employed borrower with a bad credit history, there may still be personal loan options available to you, such as securing your personal loan against a vehicle of equity in a property, though your interest rates may be higher than those of other borrowers. Consider contacting a lender before applying to discuss your options.

Can I get a $2000 loan on Centrelink?

If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.

Some lenders may offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.

Do $4000 loans have no credit checks?

Many medium amount loans for $4000 have no credit checks and are instead assessed based on your current ability to repay the loan, rather than by looking at your credit history. While these loans can appear attractive to bad credit borrowers, it’s important to remember that they often have high fees and can be costlier than other options.

Personal loans for $4000 are more likely to have longer loan terms and will require a credit check as part of the application process. Bad credit borrowers may see their $4000 loan applications declined or have to pay higher interest rates than good credit borrowers.