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Compounding Interest - How to make it work for you?

The cool thing about the concept of compounding interest is that it’s pretty simple and it’s an easy thing to take advantage of if you’ve got the capacity and desire to do so.

Brief explanation below…

  1. The bank charges interest on your loan balance daily, then bills you for that on a weekly/fortnightly/monthly basis.

  2. So if you have a $100,000 loan and get charged 5.2% interest that’s $5200/yr, or $100/wk.

  3. At the end of week one you’re then getting charged interest on $100,100, so at the end of week 2 you’re charged $100.10 in interest

  4. Eventually, you make a payment (interest only, or interest plus principal) and the balance drops but the accrual of interest and increasing interest charges start all over again

So basically you’re getting charged interest, on the interest you’ve already been charged. It compounds this way in exactly the same way it compounds when you’ve got money on deposit… where you’re getting paid interest on money that was previously paid to you as interest.

So how do you beat this?

A revolving credit facility is the best way to do this. Learn more about clever ways to use them, here.  Basically, you put your spare cash in an account to help your interest charges.

So imagine this scenario…

  1. You have a $100,000 loan and get charged 5.2% interest that’s $5200/yr, or $100/wk.

  2. You make payments of $200/wk - $100/wk goes to interest  

  3. But you put an extra say $1000 into a revolving credit account which reduces the amount you are charged interest on, this saves you $1 per week.

  4. You pay $200/wk as normal but instead of $100/wk being paid off the loan balance, you now pay $101/wk off the loan balance because of that $1 interest saving.

  5. Next week you pay interest only even less because of the $1 less than you owe

  6. And so on and so on it compounds

These are small numbers as an example but it illustrates the fact that you can get charged less interest and that helps to accelerate the rate at which you can pay back your loan.

So how can we help?

Our role is to ensure you’ve got the best deal (save interest, save money, pay your loan off faster) and the right structure (set it up for your benefit, not what’s easiest for the bank) to help you get ahead.

 We do this by learning about your personal situation and your goals, then we match you to the bank and the product which is best going to help you achieve those goals. And of course, our service is free.


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