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The interest on loan will be
1) Paid in fixed installments with capital
2) Set rate at the end of balance period is calculated so that bulk interest is paid early on (as repayment mortgage .)
3) Equally throughout loan.Explain these three ways of paying interest, tutor.
I don’t think the options are explained well.
Basically there are three main ways of paying interest
1 The repayment mortgage method. Here each month a fixed payment is made which is a mix of capital and interest. At the start of the mortgage the loan is high so the interest element in the monthly payment is high. As capital is gradually paid off, the interest element of the monthly payment decreases and the capital element increases, but the total monthly amount stays the same.
2 Let’s say there is a loan of £3,000 repayable in three 1,000 installments at the end of each year. Interest is 5%. Total repayments each year are
Year 1 1000 capital and 150 interest (3,000 x 5%)
Year 2 1000 capital and 100 interest (2,000 x 5%)
Year 3 1000 capital and 50 interest (1,000 x 5%)Here total annual payments decrease.
3 Interest is calculated on the initial balance. In the above example 3000 x 5% x 3 years = 450 (Note that the effective rate of interest on the amount borrowed is >5%)
Each year 1000 of capital and 150 interest are paid.
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