Working out monthly interest......

geordie_ben

Ok, I'm trying to plan a budget and need to get my head around how the interest works.

I have an overdraft of £1000 at 19.9%

Am I correct in thinking if I pay £200 that month then £183.42 will be paid off the balance and the other 16.58 will go towards paying the interest, thus bringing the balance down to 816.58??

Then the next month I pay another £200 off, 186.46 gets paid off the balance and £13.54 pays the interest? and so on and so on?

Any help is much appreciated :-D

YorkshireBoy

When you say "overdraft", are you referring to a current account or credit card? It's just that you say overdraft but have then posted on the credit card forum.

geordie_ben

I just used my over draft to make it simple

i have an over draft of £1000 at 19.9%
one credit card at around £5500 @ 8.94%
and another card of around £720 @ 16.9%

So really just trying to find out the rule on how interest works into payments

sorry for the confusion

YorkshireBoy

Your thinking is broadly correct, although it's not a straight-forward calculation on a balance that changes daily.

The interest accrues daily at...

Closing balance x 18.3% / 365

...and is charged to the account once per month.

If the £1,000 was a static balance then the interest would indeed be...

£1,000 x 18.3% / 365 x 31 = £15.54 for the (31 day) month.

So, yes, paying £200 would reduce the balance by (£200 - £15.54 £184.46

geordie_ben

sorry to sound thick, but where does the 18.3% come from when the interest rate i'm paying is 19.9%?

YorkshireBoy

The monthly rate is 1.5239%

The annual non-compounded equivalent rate (often termed 'simple interest') is 12 x this figure, ie 18.3%.

Someone will come along and explain the maths (if you want them to?). I don't do maths...not least because there are calculators that will work it out for you. Here's one...

http://www.stoozing.com/mon2yr.htm

geordie_ben

That makes no sense to me, but I can still apply it so thanks very much :-D

Robert_Sterling_3

YorkshireBoy wrote: »

The monthly rate is 1.5239%

The annual non-compounded equivalent rate (often termed 'simple interest') is 12 x this figure, ie 18.3%.

Someone will come along and explain the maths (if you want them to?). I don't do maths...not least because there are calculators that will work it out for you. Here's one...

http://www.stoozing.com/mon2yr.htm

I confirm that if the annual rate (AER not APR) is 19.9% then the monthly rate is 1.52389% or 1.5239% approx.

Saying that 1.52389% monthly rate is 18.3% annual rate when the monthly rate was derived from an annual rate of 19.9% makes no sense what so ever. Not compounding the monthly rate makes no sense whatever. To give a monthly rate which is accurate to 4 decimal places and then to adopt a "Simple Interest" approach to get its the annual rate is unbelievable. We actually knew the annual rate right from the start.

YorkshireBoy

Robert_Sterling wrote: »

(AER not APR)

I think you'll find that, where overdrafts are concerned, it's EAR (Effective Annual Rate) Robert. AER is used for savings accounts or other accounts paying in-credit interest.

Saying that 1.52389% monthly rate is 18.3% annual rate when the monthly rate was derived from an annual rate of 19.9% makes no sense what so ever. Not compounding the monthly rate makes no sense whatever. To give a monthly rate which is accurate to 4 decimal places and then to adopt a "Simple Interest" approach to get its the annual rate is unbelievable. We actually knew the annual rate right from the start.

The objective was to determine the interest that would be accrued daily (being as overdraft balances almost always fluctuate daily). Is there a better way to determine the daily rate (from the information that was provided) than that which I tried to use?

CLAPTON

geordie_ben wrote: »

I just used my over draft to make it simple

i have an over draft of £1000 at 19.9%
one credit card at around £5500 @ 8.94%
and another card of around £720 @ 16.9%

So really just trying to find out the rule on how interest works into payments

sorry for the confusion

the basic principle is, all things being equal to pay off as much as possible on the debt with the highest APR and to pay only the minimum on the others.

However, overdrafts are rather diffferent for two reasons

a. they are liable to be cancelled or reduced with little or no notice; this seems to be happening a lot at the moment so maybe best to concentrate on reducing this

b. assuming your salary is going into the OD a/c then the balance will fluctuate during the month: as interest is calculated on the daily balance then the interest will be lower than otherwise expected... however, I'ld still concentrate on reducing the OD.

Robert_Sterling_3

My main thrust was this:-

If you start with an annual rate to derive a monthly rate then when you convert the monthly rate back to an annual rate you should get back to where you started i.e. 19.9% in this case.


Ending up with 18.3% is just not on.