Monday, April 24, 2006

How Much Interest Do You Have to Pay on a 10,000 Dollar Loan?

When you borrow money, not only do you have to gradually pay back the money you borrowed, the principal, but you also owe interest, which can make up a significant portion of your repayment. The amount of interest you will have to pay on a loan of $10,000 depends on a few factors.

Interest Rate

    The single most important factor in calculating how much interest you have to pay is the interest rate. The interest rate expresses the percent of your principal balance that you owe in interest each year. Your interest rate varies, depending on your credit score and the type of loan you got. Secured loans and federal student loans have lower interest rates than unsecured loans. Calculate your monthly interest rate by dividing your annual rate by 12. Multiply your monthly rate by your balance to find out your monthly interest payment. For example, if your interest rate is 6.8 percent, your monthly rate is 0.567 percent or 0.00567 when expressed as a decimal. In this case, your monthly interest would be $10,000 times 0.00567, or $56.70.

Repayment Term Length

    Most loans are amortized, meaning that you have monthly payments of a fixed amount for a fixed length of time. The longer your repayment term, the more interest you will have to pay overall. For example, if you repay $10,000 at 6.8 percent interest over 10 years, your monthly payment is $115.08 and you pay a total of $3,809.64 in interest over those 10 years. If, on the other hand, you stretch out your repayment over 20 years, your monthly payment drops to $76.33 but you pay $8,320.15 in interest over 20 years. This is because you are reducing the principal balance more slowly, and therefore the interest calculation each month is larger than it would be if you owed less.

Extra Payments

    If you make extra payments on your loan, you will pay less interest than if you stick to the repayment schedule. Each extra payment you make goes entirely toward paying down the principal balance. This, in turn, reduces your interest payment each subsequent month. For example, if you had a loan for $10,000 at 6.8 percent interest with a 10-year repayment term and you made an extra payment of $1,000 at the end of the first year, you will pay off the loan 15 months earlier than scheduled. Your total interest cost will be $3,042.51, which is $767.13 less than it would have been without the extra payment.

Calculate Your Loan

    Use an online loan calculator to find out how much interest you will have to pay on your $10,000 loan. To use the calculator, you need to know the interest rate on your loan and the length of the repayment term. Enter these numbers into the calculator to find out your monthly payment. View the amortization table to see how much of each monthly payment is interest and how much total interest you will pay. You can also enter extra payment amounts to see the effects they would have on your interest costs.

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