Personal Finances

Understanding the Minimum Monthly Payments on Your Debt

Monthly payments tend to make the largest impact on an individual's wallet

Monthly payments tend to make the largest impact on an individual’s wallet

It is often not the amount of debt that is a problem for most folks. It is the monthly payments that cause the largest impact on individuals’ wallets. There are three factors that determine how much your monthly payment will be. First, there is the amount of principal to be repaid. Second, there is the rate of interest on the unpaid principal—the annual percentage rate (APR). Finally, there is the number of monthly payments. Obviously, the more you borrow, the larger your monthly payment will be over a fixed number of months at a fixed rate. If the number of months is increased, the monthly payments will be reduced. Likewise, a lower rate will lower the monthly payments for the same amount of debt as long as the number of months remains the same.

Three factors determine your monthly payments: amount of principal, interest rate, number of monthly payments. There may be a way to tell if you have too much debt.

Understanding the minimum monthly payment

Some debts obscure the number of payments due, as well as the interest rate. Consumer revolving credit, like credit card debt, is an example. Sure, you know how much you borrowed when you made the credit card purchase, but you may not have been cognizant of the actual interest rate or the number of monthly payments. This works in the lender’s favor and against you. When a lender tells you what your minimum monthly payment is, you may be unaware that it barely pays the monthly interest and allocates only a small amount against principal. Revolving credit rates may vary, so it is that much harder to track your loan. Using the lender’s minimum monthly payment could result in taking years to repay even a small debt. The result is that you may pay much more for the loan than if you took a conventional loan with a fixed rate and fixed number of payments.

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