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International student loan

Understanding the Basics of Interest and Interest Rates for International Student Loans

International student loan

Understanding international student loans and everything they entail can be a very difficult task. Perhaps one of the more important aspects to understand about international student loans is interest rates and interest, doubly so it comes to understanding how to repay your international student loan. Interest, relating to international student loans, is the amount of money that is owed to the lender on top of the principal amount due. The amount of interest owed is determined by the interest rate of the loan. Therefore, when you repay your international student loan, you will not only be repaying the amount you borrow (the principal), you will be paying the interest accrued depending on the interest rate. For a full general overview of international student loans, please follow this link.

How are Interest Rates Used?

 When it comes to repaying your international student loan, the repayment amount is made up of both the principal and the interest. The principal amount is the amount of money that you borrowed. For example, if you borrowed $100, and had to pay it back over a period of 1 year at no interest, each month you would pay $8.33. With that example, you would only be paying back the principal. If you borrowed $100 and had to pay it back over a 1-year period with a 10% interest rate, each month you would pay $8.79 for a total of $105.50.

An important aspect of understanding interest rates is amortization. Amortization is the process of paying off a debt, or in this case a loan, over a certain time with regular payments. It shows which portion of the repayment goes toward interest and which portion of the repayment goes toward the principal. The end goal of an amortization schedule is to show how over time, the balance of the repayment goes to $0.00. A useful online tool for making an amortization schedule can be found by following this link.

Amortization Example No Interest

Let’s go through an amortization schedule of both examples above.

First, the schedule below represents the loan repayment without an interest rate. As you can see, it gets repaid over a 12-month period, and each payment fully goes toward the principal, lowering the principle balance by that amount for the month, since there is no interest to pay.

MONTH PAYMENT BALANCE
1 $8.33 $91.67
2 $8.33 $83.34
3 $8.33 $75.01
4 $8.33 $66.68
5 $8.33 $58.35
6 $8.33 $50.02
7 $8.33 $41.69
8 $8.33 $33.36
9 $8.33 $25.03
10 $8.33 $16.70
11 $8.33 $8.37
12 $8.37 $0.00
TOTAL $100.00

 

Amortization Example with Interest

Now, let’s add interest to the example. The schedule below represents the loan repayment with an interest rate of 10% over a 12-month period. As it was before, there are still 12 repayment periods, one each month. However, this time, the payments include interest as well as the principle. As you can see with each subsequent installment period, the principal balance on the loan lowers. However, the balance does not lower the full repayment amount as it did in the previous example. It only lowers the amount of the principle (repayment amount minus interest paid) paid within the installment. Next, because the principle owed is lowered with each repayment, the interest paid for the next installment will be less. This results in decreasing interest payments and increasing principle payments within each repayment period as you can see in the example.

MONTH PAYMENT INTEREST PRINCIPAL BALANCE
1 $8.79 $0.83 $7.96 $92.04
2 $8.79 $0.77 $8.02 $84.02
3 $8.79 $0.70 $8.09 $75.93
4 $8.79 $0.63 $8.16 $67.77
5 $8.79 $0.56 $8.23 $59.54
6 $8.79 $0.50 $8.29 $51.25
7 $8.79 $0.43 $8.36 $42.89
8 $8.79 $0.36 $8.43 $34.46
9 $8.79 $0.29 $8.50 $25.96
10 $8.79 $0.22 $8.57 $17.39
11 $8.79 $0.14 $8.65 $8.74
12 $8.81 $0.07 $8.74 $0.00
TOTAL $105.50 $5.50 $100.00

 

As you can see, with an interest rate of 10%, the amount paid back to the lender is higher at $105.50 versus $100 with no interest. Generally, the higher the interest rate on the loan, the higher the total amount of interest will accrue, and thus the amount paid back will be higher.

If you have any questions on interest rates, please feel free to comment below and we’d be happy to explain further

What Exactly is an Interest Rate?

International student loan

Generally, there are two types of interest rates that you will most likely encounter when dealing with international student loans. These are known as fixed interest rates and variable interest rates.

  • Variable Interest Rates are connected to what is known as an index (LIBOR is an example of this) and are subject to change throughout the duration of the international student loan. With a variable interest rate, the lender will assign you a rate, and then your interest will be determined by the rate the lender assigned you on top of the index that the rate will be connected to. Therefore, the overall rate may fluctuate depending on the index.
  • Fixed Interest Rates stay the same throughout the duration of the loan and the repayment period. It is not tied to an index, and therefore is not subject to fluctuation like a variable interest rate may be.

Lenders typically attach one of these two types of interest rates to international student loans. Whether your loan is subject to a fixed interest rate or a variable interest rate depends on the lender and the loan you have been accepted for. We strongly suggest openly communicating with your lender about what your interest rate may be and knowing whether it will be a fixed or variable rate. For a better understanding of international student loans, follow this link.

What Will My Interest Rate Be?

The interest rate on your international student loan will depend on the lender you borrow from and may also depend on the exact loan that you have been accepted for. Understanding what your interest rate is, along with whether it is a fixed or variable rate is extremely important in order to know what your eventual repayment installments will be.

Thankfully, when you sign your loan, you will not be doing so blindly. You will be disclosed important information, including the interest rate. Ultimately, it will be up to you to know this information before agreeing to any loan. Please communicate with your lender so that you fully understand the interest rate and the complete repayment terms of any approved loan.

Understanding central bank rates may also help you find a better understanding of interest rates and how they relate to international student loans. For more information on central bank rates, check out this video of Nomad Credit Founder Brian discussing the topic. For more information on repaying your international student loan and a general overview of repayment, please follow this link.

International Student Loan

Nomad Credit is happy to help you navigate the difficult process of searching for education loan options.

Please visit us at www.nomadcredit.com to search for your student loan (also known as education loan) options including options for international students. Please don’t hesitate to email us at help@nomadcredit.com if you have any questions about interest rates, international student loans, or anything else.

 

 

 

John Romanucci

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