Personal finance - WJECLoans

Loan repayments

When you borrow money from a bank, building society or a lending company, it is called a loan. People must pay interest on top of the amount of money they borrow. The interest is worked out as a percentage of how much money was borrowed. The longer it takes to pay back the loan the more interest will be charged.

Interest is calculated in the same way as a savings account, but this time the customer is paying the bank the money.

Example

Ieuan is in university and needs to take out a £9,000 student loan in his final year. The rate of interest is 3% AER and he is hoping to have enough funds to pay it back after three years. How much will he owe at the end of the three years?

You will need to find 3% of the original amount and then add it on. This will show how much is owed at the end of the first year. You will then need to find 3% of the new amount to see how much is owed at the end of the second year, and then use the same method to work out how much is owed at the end of the third year.

This table shows how you would arrive at your answer:

At the end of the first year Ieuan will have the full amount of money (100%) and the interest (3%). So he has 103% which as a decimal is 1.03. This is our multiplier.

After the first year he will owe: 9,000 × 1.03 = £9,270

In the second year it will be: 9,270 × 1.03 = £9,548.10

After the final year it will be: 9,548.10 × 1.03 = £9,834.543

or, 9,000 x 1.03³

As it is money you have to round your answer to two decimal places: £9,834.54.