APRs are not what they seem at first sight. Let’s say you got approved for a $6,000 loan to be paid over 5 years with a 27% APR. Do you know how much that loan will cost you?
We might think 27% means 27% x $6,000 = $1,620 is the total interest you’ll pay.
But no, that’s the interest you pay yearly!
But you won’t actually pay $1,620 every year because your loan doesn’t stay at $6,000. If you keep up with your re-payment terms, you’re paying money on the loan each year.
The interest is calculated again every year based on what you have remaining on the loan.
Here’s what it looks like:
Year 1 – 27% x $6,000 = $1,620 interest
But let’s say you paid $700 of the loan itself. So your loan now is $6,000 – $700 = $5,300 at the end of Year 1.
Interest is now calculated on the principal of $5,300.
Year 2 – 27% x $5,300 = $1,431 interest
This year, you were able to pay $900 on the loan. What’s remaining is now $4,400
Year 3 – 27% x $4,400 = $1,188 interest
But you also paid $1,100, the remaining loan is now $3,300
Year 4 – 27% x $3,300 = $891 interest
You paid $1,500, the remaining loan is now $1,800
Year 5 – 27% x $1,800 = $486 interest
And you pay the rest of the loan, $1,800. Your loan is now paid off.
Total You Paid For The Loan: $11,600
On the $6,000 loan, you paid a whopping $5600 in interest. In total, you paid $11,600, yikes! Also, it’s essential to remember that these loan calculations are done monthly, not yearly.