Type of interest
There are two ways of how interest is calculated, flat rates and reducing balance loan method. Personal loan and hire purchase (car loan ) use flat rates method whereas mortgage loan uses reducing balance loan method.
A flat rate is calculated using straight line method. The total interest is calculated throughout the whole tenure base on the loan applied. Total payment is the sum of total loan plus the total interest.
Interest per annum: 5%
Tenure: 5 years
Loan amount: 50,000
Total Interest = 5% x 5 x 50,000
Total Payment = 50,000+ 12,5000
Installment = 62,500/60(months)
For the reducing balance loan method, the interest is calculated on the outstanding balance of the loan. By installing Karl’s mortgage calculator from app store or google play, you can easily find out how much is the payment each term and how much is the interest charges on different period.