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Now, let's see the same thing again, but with R2 000 being repaid each year. We expect the numbers to change. However, how much will they change by? As before, we owe R1 425 in interest in interest. After one month. However, we are paying R2 000 this time. That leaves R575 that goes towards paying off the capital outstanding, reducing it to R189 425. By the end of the second month, the interest owed is R1 420,69 (That's R189 425 × i 12 ). Our R2 000 pays for that interest, and reduces the capital amount owed by R2 000 - R1 420,69 = R579,31. This reduces the amount outstanding to R188 845,69.

Doing the same calculations as before yields a new loan schedule shown in [link] .

A loan schedule with repayments of R2 000 per month.
Time Repayment Interest Component Capital Component Capital Outstanding
0 R 190 000 00
1 R 2 000 00 R 1 425 00 R 575 00 R 189 425 00
2 R 2 000 00 R 1 420 69 R 579 31 R 188 845 69
3 R 2 000 00 R 1 416 34 R 583 66 R 188 262 03
4 R 2 000 00 R 1 411 97 R 588 03 R 187 674 00
5 R 2 000 00 R 1 407 55 R 592 45 R 187 081 55
6 R 2 000 00 R 1 403 11 R 596 89 R 186 484 66
7 R 2 000 00 R 1 398 63 R 601 37 R 185 883 30
8 R 2 000 00 R 1 394 12 R 605 88 R 185 277 42
9 R 2 000 00 R 1 389 58 R 610 42 R 184 667 00
10 R 2 000 00 R 1 385 00 R 615 00 R 184 052 00
11 R 2 000 00 R 1 380 39 R 619 61 R 183 432 39
12 R 2 000 00 R 1 375 74 R 624 26 R 182 808 14

The important numbers to notice is the “Capital Component" column. Note that when we are paying off R2 000 a month as compared to R1 709,48 a month, this column more than double. In the beginning of paying off a loan, very little of our money is used to pay off the capital outstanding. Therefore, even a small increase in repayment amounts can significantly increase the speed at which we are paying off the capital.

What's more, look at the amount we are still owing after one year (i.e. at time 12). When we were paying R1 709,48 a month, we still owe R186 441,84. However, if we increase the repayments to R2 000 a month, the amount outstanding decreases by over R3 000 to R182 808,14. This means we would have paid off over R7 000 in our first year instead of less than R4 000. This increased speed at which we are paying off the capital portion of the loan is what allows us to pay off the whole loan in around 14 years instead of the original 20. Note however, the effect of paying R2 000 instead of R1 709,48 is more significant in the beginning of the loan than near the end of the loan.

It is noted that in this instance, by paying slightly more than what the bank would ask you to pay, you can pay off a loan a lot quicker. The natural question to ask here is: why are banks asking us to pay the lower amount for much longer then? Are they trying to cheat us out of our money?

There is no simple answer to this. Banks provide a service to us in return for a fee, so they are out to make a profit. However, they need to be careful not to cheat their customers for fear that they'll simply use another bank. The central issue here is one of scale. For us, the changes involved appear big. We are paying off our loan 6 years earlier by paying just a bit more a month. To a bank, however, it doesn't matter much either way. In all likelihood, it doesn't affect their profit margins one bit!

Questions & Answers

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Adzaho Reply
the situation that prevails when economic forces balance so that economic variables neither increase nor decrease
Bombey
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salihu Reply
Economics is important because it helps people understand how a variety of factors work with and against each other to control how resources such as labor and capital get used, and how inflation, supply, demand, interest rates and other factors determine how much you pay for goods and services.
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the proces of using the services of labor and equipmnt together with other in puts to make goods and services availble
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A firm is a business entity which engages in the production of goods and aimed at making profit.
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Elacisity
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Debless Reply
Demand refers to the quantity of products that consumers are willing to purchase at various prices per time while Supply has to do with the quantity of products suppliers are willing to supply at various prices per time. find the difference in between
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Source:  OpenStax, Siyavula textbooks: grade 12 maths. OpenStax CNX. Aug 03, 2011 Download for free at http://cnx.org/content/col11242/1.2
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