Topic

Loans and debt

How loan payments work, how to compare bank offers and how much you can save by paying debt off the smart way.

Articles

How loans work and where the extra cost hides

Every loan payment has two parts: principal, the money you borrowed, and interest, the bank's charge. Interest is calculated on the remaining balance, so it is highest at the start of the term. That is where most of the extra cost hides, and where the biggest chance to save lies.

interestprincipalMonth 12,000 interest · 7,456 principalMonth 61,224 interest · 8,232 principalMonth 12185 interest · 9,271 principal
An annuity payment of UAH 9,456 on a UAH 100,000 loan at 24% a year for 12 months. At the start, over a fifth of the payment goes to interest. WM² calculation.

What to check before taking a loan

  • The real annual rate and the total cost, not just the nominal rate.
  • Fees and insurance: one-off, monthly, mandatory or optional.
  • Payment type: annuity or equal principal. We cover the difference in “Annuity or equal principal payments”.
  • Early repayment terms: is there a fee and how is the schedule recalculated?
  • The load on your budget: payments on all your loans should not stop you from saving. How to split income is explained in our article on the 50/30/20 rule.

FAQ

How do I compare loans from different banks?

By the real annual interest rate and the total cost of the loan. Ukrainian banks must disclose both before you sign. These figures include fees, insurance and other payments, so they are more honest than the nominal rate.

Which is cheaper: annuity or equal principal payments?

In terms of interest, equal principal payments usually cost less because the debt is repaid faster. An annuity is easier on the budget: the payment is the same for the whole term. A worked example is in our article on payment types.

Does it pay to repay a loan early?

Yes, if the contract has no early repayment fee. Extra payments reduce the balance on which interest is charged. Repaying early in the term and shortening the term, rather than the payment, saves the most.