Works out how many payments it takes to clear a revolving balance at a fixed monthly amount, and how much interest that costs. Interest is charged on the balance each month, so a smaller payment leaves the principal barely moving and the total climbing.
This works out how many payments it takes to clear a revolving balance at a fixed monthly amount, and what the interest comes to.
Interest is charged on the balance each month. The following is repeated month by month until the balance reaches zero.
is the monthly rate, the annual rate divided by 12.
Each payment covers the interest first, and only what is left goes against the principal. A small payment is mostly interest, so the principal barely moves, and interest keeps being charged on a balance that will not come down. The total climbs sharply.
A balance of 300,000 at 15% a year with payments of 10,000. The monthly rate is 1.25%, so the first month's interest is 3,750 and only 6,250 goes against the principal. Clearing it takes 38 payments, three years and two months, with 378,000 paid in total and 78,000 of that interest, a quarter of the sum borrowed.
If the monthly payment does not cover the first month's interest, the balance grows rather than falls and the debt is never cleared. That case is refused rather than calculated. On the same 300,000, payments of 3,000 fall short of the 3,750 of interest.
The calculation assumes nothing further is charged to the account. Revolving credit grows with each new purchase, so in practice it takes longer still.