loan calculation

techno_saver

Hi.

Could anyone help with a loan repayment calculation?

If I borrow £5500.00 at an APR of 10.5% (divided by 13 translates to a monthly figure of 0.8%) I calculated the interest per month at 0.8% on the outstanding balance. Therefore 73 monthly payments of £100 clears the loan.

However when I put the figures through a loan calculator it specifies the APR as 5.6%.

I used http://www.drcalculator.com/calc/rule78.cgi

Am I overlooking something?

Thanks.

Robert_Sterling_3

I checked your calculations using Excel.

I agree with your figures.

One little niggle. Perhaps you should use more accuracy than the one significant figure used in 0.8% per month.

10.5% per annum is about 0.8355% per month

However these figures , as you appear to know, are not consistent with an apr of 5.6%.

techno_saver

Hi, thanks Robert for the reply.

What sum do you use to translate the APR into the monthly interest rate?

Thanks.

Rafter

To calculate the monthly interest rate from an APR use the following formula in Excel:

=(1+10.5%)^(1/12)-1

The APR is a 'compound interest rate' and therefore to get back to a monthly rate you need to find the rate which, when multiplied by itself 12 times, is the equivalent to 10.5% per year.

The reason for using a compound rate is that you pay interest on interest, although the total amount of most loans is reducing over time as you make payments.

The annual interest rate on the website you used is not the APR. It takes the total interest bill of £1900, divides it by the number of months and multiplies by 12 to give an annual interest bill. It then divides this bill by the full £5,500 of the original loan to give a rate of 5.6%

This is the 'trick' used by car dealers to make their finance schemes look better value than personal loans, even though the APR is often 2x that of the 'annual interest'

R.

Robert_Sterling_3

I have now deleted one of my earlier messages.