Managing repayments

Because of compound interest, debt that isn’t paid down grows over time, and it can easily get out of hand.

Interest is calculated on the current balance of the outstanding debt, plus any interest that has been applied to it. This means the debt can grow rapidly over time and become harder to repay.

Imagine a ten-thousand pound loan at 6% APR compounded monthly. The monthly interest rate is 6% APR divided over 12 months, which is 0.5% interest added each month to the outstanding balance.

The first month’s interest on the £10,000 you borrowed, otherwise known as the principal, is £50. If you pay only £50 per month, you’re paying just the interest. The principal – or the original ten-thousand pound loan –  never goes down, and so potentially, the loan is never repaid.

In reality, this is never allowed to happen. Lenders will not allow repayments like this to continue over a long period of time. In theory, you could keep paying £50 every month forever and still owe £10,000. The exception to this is interest-only mortgages.

What would happen if you pay £75 per month? This would only pay £25 above the interest at the start.

The loan is eventually repaid, but very slowly. It takes 221 months, or just over 18 years to clear. And the total interest paid over the eighteen year life of the loan – would equate to £6521.

So in total, after 18 years, you would have paid the principal the £10,000 plus £6,521 interest, totalling £16,521.

If you were to pay £200 per month, the loan is repaid much faster. It would take 58  months or just under 5 years. The total interest paid would be £1,536. In total, this loan has cost you £11,536.

Paying only a little extra, like £75, makes the loan almost four times longer to repay than paying £200. You also pay more than four times as much interest over the life of the loan. £6,521 versus £1,536.

In practice, taking eighteen years to pay off a debt is unlikely. This is because of financial regulation and monitoring of persistent debt. Persistent debt is a problem that the Financial Conduct Authority – or FCA – keeps a close eye on.

So what does persistent debt mean?

It happens when someone has a debt, and for eighteen months or more they’ve been making payments, but most of the money is just covering interest, fees and charges. Very little is actually reducing the amount they borrowed.

This usually happens if someone only makes the minimum payment or pays just a little bit more. The result? The balance hardly goes down and it can take years and cost a lot more to clear the debt. That’s why the FCA has rules to monitor persistent debt.

These rules are there to protect people, to make sure lenders step in and help customers find better ways to repay what they owe before the debt becomes too heavy to manage.

Before taking on debt, it’s important that you know the interest rate. You should carefully plan for the monthly repayments for the duration of the debt. Even a modest increase in monthly repayments can cut years off your loan and save thousands of pounds in interest.

Understanding how credit and interest rates work is a good first step towards managing your finances. Credit can feel like free money, but it isn’t. Relying on credit for everyday expenses can lead to a cycle of debt, which can be tough to break.

If you have a credit card with an interest-free period, it’s a good idea to plan your spending and repayments so the full balance is cleared before the 0% period ends. This way, you won’t pay any interest.

Another option is to move a balance to a different 0% card, though there’s usually a fee for balance transfers. Using 0% balance transfers can help you save money on interest, pay off debt faster and make it easier to manage multiple debts. Since more of your payments go toward the amount you owe rather than the interest, it can also free up money for other expenses. However, switching cards too often can affect your credit score.

Managing credit responsibly helps you build a positive financial reputation and avoid unnecessary debt. Always borrow only what you can realistically afford to repay and make payments on time to protect your credit score.

Keep balances low on credit cards and avoid relying on them for everyday spending. Regularly check your credit report to spot errors or signs of fraud early. Comparing different credit products before borrowing can help you find the best deal for your situation.

Whether you’re serving, moving postings, preparing to leave service, or settling into civilian life, staying informed and disciplined helps you use credit as a helpful financial tool, rather than a long-term burden.

If you’re already managing several debts, see our video on making a plan for methods to help you tackle them.