Interest

Borrowers will normally be required to pay back to a credit scheme more than they originally borrowed: there will be an interest or administration charge added to the loan.

The management committee will need to set the level of interest to be charged (see Chapter 8: Sustainability) and to decide on the method of calculating the loan repayments.

The simplest method of calculating interest is the straight-line method. Here, the interest is spread equally over all the repayments. For example, a loan of 30,000 is to be repaid in 12 monthly instalments. There is an administration charge or interest of 10 per cent (3,000). Using the straightline method, there will be 12 monthly repayments of 30,000 : 12 = 2,500, and 12 monthly instalments of interest of 3,000 : 12 = 250. If the loan were to be repaid over 24 months, the management committee might still decide to charge interest of 10 per cent per year. In this case, the total interest on the loan would be 2 x 3,000 = 6,000. Using the straight-line method, there would be 24 monthly repayments of 30,000: 24 = 1,250 and 24 monthly instalments of interest of 6,000 . 24 = 250.