Can someone please explain monthly interest to me!

fairenoughclough

tomstickland wrote:

The average month will pay 1/12th of the yearly rate though, not 30/365ths. 12x30=360. Small difference I agree!

NO.
There's no such thing as an average month.

A month's interest will be N (number of days in the particular month)/Y (number of days in the year in question 365 or 366) times the balance times 0.8 (if basic rate tax payer).

Thinking about this has raised some very dull questions :-

If you open an account in a leap year after Feb 29, does your monthly interest calculation use 365 or 366 ?

Where interest is not paid on the first of the month, which month is used for the interest calculation, starting month or month interest paid ?

Why don't I go out more ?

tomstickland

Why do you say that there's no such thing as an average month?
The average length of a month is 30.4 days (365/12). The interest paid in an average month would add up over 12 months to the interest paid over the year. No real month will be average month, but that's the whole point of an average. My original point was that the average month is 1/12 of a year not 30/365th of a year.

Real month lengths: 31 28 31 30 31 30 31 31 30 31 30 31

isasmurf

tom, we're you not paying attention last month? I thought we'd already been through this.

Interest is calculated daily, ie. 1/365th of the gross interest rate each day. If interest was paid at the end of each month, the interest payment in November would be 30*1/365th=30/365th of the gross interest rate. If interest was calculated monthly then 1/12th would be appropriate.

which brings me on to these

fairenoughclough wrote:

Thinking about this has raised some very dull questions :-

If you open an account in a leap year after Feb 29, does your monthly interest calculation use 365 or 366 ?

That depends on your bank some use 366 days, some use 365 days.

fairenoughclough wrote:

Where interest is not paid on the first of the month, which month is used for the interest calculation, starting month or month interest paid ?

Neither. It is the number of days that have passed since the last interest payment * 1/365.

tomstickland

Each specific month will pay n/365 of the annual amount where n is the number of days in the month.
The average monthly payment over the year will be 1/12th.



OHHHHH I get it - 30 was used because November is 30 day month.

Funny thing is though, the difference between a 28, 31 or 30.4 day month is not very much LOL.

YorkshireBoy

tomstickland wrote:

Funny thing is though, the difference between a 28, 31 or 30.4 day month is not very much LOL.

It is on a £70K stooze pot Tom.

xela_17

Thanks for all your replies. Understand better now.