Managing my money

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4.1.2 More on interest

Let’s look at interest payments in more detail. If £10,000 is borrowed and no repayments of this principal sum are made during the year, and the interest rate is 7% p.a. with interest being paid once a year at the end of the year, the interest charge for that year is £700.

So, provided the principal sum owed to the lender remains at £10,000 and the interest rate is 7% p.a., the borrower will have to pay £700 each year to the lender. This is an example of a simple interest calculation where the interest rate is applied just to the original sum borrowed.

If you want to look further into the cost of borrowing and the interest you pay on a loan, you can practice using the MAS loan calculator [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .

Figure 2
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