LMW Interest Powerpoint Slides
The interest amounts on slides 14 – 17 of the PowerPoint could be confusing for KS3 students. For example slide 14: 9.9% of £1000 does not work out at a total loan of £1099; this is because most personal loans calculate interest monthly on the remaining outstanding principal of the loan.
With KS3 get the students to focus on three factors when taking out a loan:
- Amount borrowed
- Term of loan
- Loan APR
Aim to focus the groups thinking around why you would choose one loan over another and not on how interest is calculated.
If you are comfortable with the topic and have a high ability group, you can move onto looking at the way that financial institutions calculate loan repayments. Below is an explanation of how the interest is calculated on this loan, but not how it would be presented in a loan agreement.
In this example each month the principal repayment is £83.33 (£1000/12). In the first month the interest payable is £8.25 (9.9% of £1000/12) because there are 12 monthly payments. In the second month interest is £7.56 which has been calculated on the remaining principal of £916.67 (9.9% of 916.67/12) and in the third month interest is £6.87 and so on until the last month. Rather than you paying a different amount each month the bank calculates an average monthly payment (principal + interest) to equate to the total required.
APR is a guide to the total cost of the loan and will also incorporate other costs such as processing fees. In this example there are no arrangement fees so 9.9 % represents the APR.