Contents.
What is a loan?
A loan is money that a bank or other financial institution provides to a borrower under certain conditions, including the loan amount, repayment period, and interest rate. There are consumer, mortgage, and other loans. Each of them has its own characteristics, but a common structure that includes the loan body and interest. Before borrowing money, you should assess your capabilities and calculate whether you can pay it back.
What is the loan principal?
Loan principal is the principal amount of a loan that a borrower receives from a bank or financial institution. It's the money you borrow and agree to pay back. For example, if you take out a loan for UAH 100,000, this amount is the loan principal.
It does not include interest, fees, or other additional charges. This is a pure loan that you receive in your hands or bank (card) account. The loan agreement specifies this amount separately from other payments.
How the loan principal is calculated
The calculation of the loan principal is quite simple: it is the amount you borrow. However, it is important to understand how this affects future payments. Banks and MFIs usually offer a handy calculator where you can calculate the total cost by changing the loan amount.
When calculating the total cost of the loan, it is important to consider the type of payments:
- annuity — the monthly payment is the same, but the ratio of loan principal to interest varies;
- differentiated — the amount of the monthly payment decreases as the loan principal is repaid in equal installments, and interest is accrued on the remaining balance.
The choice of payment type can significantly affect the total amount of overpayment, so before applying for a loan, you should carefully consider both options and choose the one that suits you best.
How the loan body affects the total amount to be paid
The loan principal is the basis for calculating interest. The more substantial it is, the more interest the borrower will pay. Therefore, it is important not to borrow more than you need.
The rate of repayment of the loan principal affects the total overpayment. The sooner the borrower repays the principal, the less interest is accrued (provided that differentiated payments are chosen). Therefore, if possible, it is better to make early payments, reducing the loan principal.
How the loan principal is repaid
The loan principal is repaid gradually, with each installment. In the case of annuity payments, at the beginning of the loan term, most of the payment goes to repay interest rather than the loan principal. With a classic differentiated scheme, the opposite is true.
Banks usually provide a detailed schedule where you can see what part of the payment goes to repay the loan principal and what part goes to interest. This helps you better control the debt repayment process and plan your budget.
Can interest exceed the loan principal?
The answer to the question of whether interest can exceed the loan principal is often a concern for borrowers. According to Ukrainian law, starting from March 2024, this is not possible. This position is enshrined in the Law of Ukraine “On Consumer Protection” and other regulations governing microcredit and bank loans.
According to the provisions, the amount of interest, as well as fines and other charges on a loan cannot exceed its principal. This means that the maximum amount you will pay for using the money is double the size of the loan body.
Globus Plus adheres to these rules. In the GlobusPlus mobile application, you can always view full information about the terms of the loan, including the real interest rate and all additional payments. Remember that financial literacy is the key to effective management of your own funds and avoiding excessive debt. Manage your money wisely to be always in plus 🧡
