# Understanding the c. 40% per month Credit Union interest rate



## Aodhán (6 Aug 2019)

Can somebody please explain to me how Credit Unions levy the interest rate? I have a loan with a current outstanding balance of €39k (see below), upon which I should be paying an interest rate of 7.5% APR. Yet as you can see from below, *about 40% of each monthly payment of €536 is going on interest alone*. I'm 20 months of payments into a 10-year Home Improvement loan. From January 2019 until July 2019 my repayment has been distributed as €1631.01 interest; €2405.92 credit. 1631.01/4036.93 = on average 40.4% of each monthly repayment has been in interest.



02/08/2019EFT PAYMENT 284.83 (Credit)251.17 (Interest)39,173.6502/07/2019EFT PAYMENT 315.49220.5139,458.4805/06/2019EFT PAYMENT 256.53279.4739,773.9702/05/2019EFT PAYMENT 287.63248.3740,030.5002/04/2019EFT PAYMENT 418.89117.1140,318.1319/03/2019INT WEB 113.93125.8240,737.0204/03/2019EFT PAYMENT 299.41236.5940,850.9504/02/2019EFT PAYMENT 263.87272.1341,150.3603/01/2019EFT PAYMENT 279.16256.8441,414.23


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## Protocol (6 Aug 2019)

I have a 2.6% mortgage, and over 40% of my early repayments are interest.

I haven't time now for a longer reply.


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## cremeegg (6 Aug 2019)

Balance €39,000 interest rate 7.5% is €2,925 per annum. The interest for 7 months is €1,662.50 almost exactly the €1,631.01 you refer to, the €32.49 difference is because the balance was not €39,000 over the whole 7 months.

Why 40% of your payments are interest is not a meaningful question.


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## Brendan Burgess (6 Aug 2019)

cremeegg said:


> Why 40% of your payments are interest is not a meaningful question.



Very well put. 

At 7.5% pa, the monthly interest rate is about 0.6%

So to roughly calculate what interest you are charged 




41k@ 0.6% = €246 

The amount of the repayment is irrelevant. 

For example, if your loan term was 20 years, your repayments would be lower, but the interest charged would be calculated the same way.

Brendan


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## elacsaplau (6 Aug 2019)

Aodhán,

That's a brilliant deal. I've an interest only loan and it costs me 100% of my repayment every month


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## NoRegretsCoyote (7 Aug 2019)

For something like this you should have gone for a mortgage top-up.

You'll pay a LOT more interest with a CU over 10 years.

See if you can switch.


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## Brendan Burgess (7 Aug 2019)

NoRegretsCoyote said:


> For something like this you should have gone for a mortgage top-up.
> 
> You'll pay a LOT more interest with a CU over 10 years.
> 
> See if you can switch.



A great example of the rest of us answering the question, but missing the bigger picture. 

Brendan


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## TheJackal (7 Aug 2019)

Protocol said:


> I have a 2.6% mortgage, and over 40% of my early repayments are interest.
> 
> I haven't time now for a longer reply.


Is this a Credit Union mortgage of 2.6%? I got 2.9% with CANA CU


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## Zenith63 (7 Aug 2019)

Aodhán said:


> *about 40% of each monthly payment of €536 is going on interest alone*.


Stick your details into a loan repayment calculator like this one - https://www.drcalculator.com/mortgage/ - and I think it makes this fairly complex math problem a bit easier to visualise.

As you'll see on a loan of €45k over 10 years at 7.5% interest, 30% of your total repayments are going to end up being interest.  Because interest is calculated each month based on what you have left to pay off, it starts off as quite a high proportion of the monthly payment (52% in month 1 for you) and decreases over time (40% at month 36, 30% at month 60, 20% at month 85 etc) as you pay the principal down.

To make things a little more complicated on the math front, most loans are amortising (https://mozo.com.au/interest-rates/guides/calculate-interest-on-loan), which is a way of giving you a fixed figure per month to pay (easier to budget for, more profit for the lender).  You can imagine a simpler model where you decide "I want to pay the interest I owe each month, and I'll stick a fixed €XXX off the principal as well".  In the case of your loan, to get it paid off in 10 years you would need to have been putting in about €380 on top of the interest each month, which would have meant your loan repayment in month one being €660, by today (20 months in) your repayment would be €616, by the final month it would be down to about €380.  Not so easy to budget for for most people, though a tidy saving on interest...

Hope that goes someway to explain this, know when I first saw loan statements like this I was very confused...


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