Maria asks…

## interest rate student loans?

This is a common theme for my student loans:

Example of 1 of my loans:

**Interest** paid YTD: $534.06 Principal Paid YTD: $915.13

**Interest** rate: 6.5%

With 6.5% **interest** why am I paying so much in **interest**?!?

6.5% **interest** makes me think around 65

915 times .065 = 65$ So, what the heck is with 534$ in **interest**? makes no sense….

Or am I paying .065 times the whole amount of **loan** every month? Yikes, is this the same for house payments when I buy a house years down the line?

All I need is an answer to my math equation, telling me I have to pay does not answer my question. Australia did not teach you much.

Thank you mary. Answers my question.

I normally pay in full. I am pretty good with math, but student loans I did not know the calculation and your calculation explained it really well. I will knock out the larger **interest** **rates** first.Thanks for the time.

### John answers:

Yes, it is .065 (assuming 6.5% is your APR) times the remaining balance (original amount of the loan – principal already paid + interest accrued) per term (month, quarter, or year). That’s how it works with every kind of loan, including auto loans, home mortgages, personal loans, and credit cards, and works in reverse with interest-bearing accounts like savings accounts.

Not to berate you, but this is pretty basic financial information, knowledge that you shouldn’t have made it out of college, or for that matter high school, without knowing. Perhaps you should visit your local library or some financial advice websites and brush up on your personal finance knowledge. If you don’t know basics like loan interest calculations, you’re leaving yourself open to being taken advantage of in the future, be it by auto salesmen, home mortgage lenders, or the U.S. Tax code.

Paul asks…

## Please explain what the APR interest rate is on my home loan(see below)?

I understand the **interest** rate, my pre approval has an **interest** rate of 4.125% and an APR **interest** rate of 4.85%.

### John answers:

Your interest rate is a simple number based solely on the outstanding loan amount.

APR must include certain non-interest charges and fees, it requires more detailed calculation. Take a look here:

http://en.wikipedia.org/wiki/Annual_percentage_rate

Betty asks…

## Tax exemption on home loan for BDA site?

Hi,

I’m planning to buy a **home** **loan** from HDFC Limited (as HDFC Bank stopped giving **home** **loan** for BDA sites – RBI rule) @ **interest** rate of 10.15%… Will it really be 10.15% when **loan** period starts? meaning won’t there be any extra charges added every month?

Do we get tax exemption on the total **interest** paid? If not, do I get once construction of house begins?

### John answers:

In case of home loan you will not be required to pay anything extra except your EMI on monthly basis. However you may be required to pay one time processing charges at the time of applying for the loan/ approval of loan.

However, in case interest rate goes up and your loan is not fixed interest loan, your EMI will also increase or Period of your loan will increase.

Tax exemptions are available available only after completion of house and not during construction period. To know more about tax related issues of House property please visit http://www.tdsmaster.com/houseproperty.html.

Nancy asks…

## Loan interest rate confusion?

How are loans calculated? I recently got a personal **loan** for $9,050 at 12% for 36 months. If you multiply .12 by 9,050, you get 1,086, which I assumed is what I pay in **interest** over the life of the **loan**. However, my monthly payments are $301, which calculates to over $1800 in **interest**, which appears to be more like 20% **interest**. What am I missing here?

If I pay all 36 payments of $301 per month, the total **interest** I will pay would be about 20% of 9,050, so how is that considered a rate of 12% for this **loan**? I guess I want to know: 12% of what am I paying? If you say 12% per year, then how much do I multiply by 12%? One third of $9,050 since it is a 3 year **loan**?

That is great. This is exactly what I have been trying to figure out. Your info. now makes it more clear to me. The only strange thing is that my first payment on this **loan** shows a princ. payment of $182 and **interest** of $119??? Thanks again for helping me out as I am not a money person, but trying to be.

### John answers:

It’s 12% per year, not a flat 12% charge (which would be $1,086). It’s also charged on the outstanding balance, so as you pay down your loan more of your payment goes to reducing the principal and less to covering the interest charge.

You can use the PMT function in Excel to figure it out. I came out with a monthly payment of $300.59.

Edit:

This is what the first 5 months of the loan repayment would look like:

_________beg bal_______int amt__applied to prin__outstanding prin

1st month9,050.001.00%90.50301 210.50 8,839.50

2nd month8,839.501.00%88.40301 212.61 8,626.90

3rd month8,626.901.00%86.27301 214.73 8,412.16

4th month8,412.161.00%84.12301 216.88 8,195.29

5th month8,195.291.00%81.95301 219.05 7,976.24

It’s a little hard to read because this software doesn’t show the extra spaces and tends to jam the columns together. The first month you make a payment, you’d have a beginning balance of $9,050. The interest charge is figured by multiplying the monthly rate (12% / 12 months = 1% per month) by the outstanding balance (1% x 9050). Your monthly payment of $301 will cover the interest charged and the remainder will be applied to the loan. $301 – 90.50 = $210.50 which reduces your $9,050 principal down to $8,839.50. Your amount of loan outstanding going into month two is $8,839.50. As time goes on, the amount of the loan outstanding gets smaller and smaller, so your interest charged per month does too – which means more and more of the $301 goes towards paying off the loan.

Edit #2:

Sometimes the first payment doesn’t happen for more than a month from the start of the loan – they might tell you it takes awhile to set up the paperwork. In that instance, you’d be paying interest on more than 30 days, so the interest portion of the first payment would be higher. When I bought my first home, my first payment was 6-8 weeks after the loan started.

That’s one of the reasons you look at the APR (annual percentage rate) rate rather than the interest rate to find out the true interest charged. By law, they have to give that number. The higher it is above the quoted 12%, the more fees they are tacking on.

Linda asks…

## Question/Advice about a home loan??

Can you still get a **home** **loan** if you have a reposessed car on your credit even though you are paying on it? A friend of mine got a job offer in another state & is going to sell his house but would prefer to sell it to friends. He told me & 2 friends of ours that we have dibs on it if we want (cause we really like it!) but they are married & have a reposessed car on their credit right now. It was auctioned off below the original price so they have to pay the difference & are slowly paying on it……….can we still get a **home** **loan** & would there be better chances at getting one if they have me included on it? I have really good credit. (Paid off a car in my name in 2 1/2 years & never missed a payment on it or anything else.)

We are all in our 20s, STILL living w/ parents right now & are desperate to move out & live our own lives before they drive us nuts!!!!!!!

We were going to try for a VA **loan** because he is in the Army & apparently qualifies to apply for one.

### John answers:

Now a day with this competitive market, you can get a home loan with ease. With good score, you will get good rates without much of a down payment. Otherwise you’ll need alot of down payments or be prepare for a high interest rate. Whatever you do, never take an ARM or Interest rate only loans.

The true question is : can you keep up with your payments ?

Find a good broker and present him your situation , then ask him to find you the best rate in his network.

BTW. I wouldn’t co-sign a house with my married friends .

Good luck .

————–

Edited to add : Do not try lendingtree.com . Bad rates and they will pull a bunch of inquiries on your reports.

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