Working out monthly interest......

YorkshireBoy

Robert_Sterling wrote: »

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.

When compounded, yes. However, the interest isn't compounded until it's charged to the account.

It therefore accrues daily at a 'non-compounded' rate doesn't it?

Could you answer my question: "Is there a better way...?"

Robert_Sterling_3

You are wrong.
Me telling you that you are wrong is getting us nowhere.

YorkshireBoy

Robert_Sterling wrote: »

Me telling you that you are wrong is getting us nowhere.

Agreed. So please tell me why I'm wrong.

anotherpaul_2

geordie_ben wrote: »

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

As you can probably tell, you can make this calcuation very complicated if you want.

A quick and not too inaccurate method is to divide the interest rate by 12 and use that (as I think you did). If you're just looking to a quick approximation, this is a good one.

More accurately, you can approximate the monthly interest using the following formula, using decimal interest (percentage number / 100):
(12th root of (1 + annual interest rate)) -1
You could use google for this, using:
(1+0.1995) ^ (1/12) - 1 = 0.01527 or 1.527% per month.
Or in Excel:
=power(1+0.1995,1/12)-1
(note that 19.9% apr is almost certainly 19.949...%)

This gives £1 or so less interest. The difference is smaller for smaller interest rates.

Or you can go on making it more and more accurate - calculate the daily interst - same method but with 365 (or 365.25 if you want to account for leap years). Personally, this is too much effort for me - and gain in accuracy is small. (Though, as CLAYTON said, overdrafts are potentially more complicated)


I use the second option, because I can put it into Excel almost as quickly as interest /12. The daily option is too much hassle to be worth it - the extra accuracy is small.

Robert_Sterling_3

When using the daily rate the interest is calculated daily and subtracted from to the outstanding balance daily. The monthly payment is usually due on the first day and is added to the outstanding balance on the first day of the month but may usually be paid on any of the first twenty eight days of the month. The interest is compounded daily and that is why the daily rate compounded 365 times gets you back to an annual rate of 19.9%.

It is reasonable, if you want a rough answer, to divide the year into 12 parts which are not equal and treat them as if they are equal, and to apply an incorrect rate which you call the monthly rate. This gives the rough answer which you find satisfactory. That is OK by me.

Robert_Sterling_3

YorkshireBoy wrote: »

When compounded, yes. However, the interest isn't compounded until it's charged to the account.

It therefore accrues daily at a 'non-compounded' rate doesn't it?

Could you answer my question: "Is there a better way...?"

When using a daily rate interest is calculated and added to the outstanding balance daily.

In the case in question the calculation of the interest and its addition to the outstanding balance is achieved by one operation which is by multiplying the outstanding balance by the daily multiplyer i.e. by 1.000497351 in non leap years and by 1.000495991 in leap years.

clio

R-S Your wrong - deal with it. Snotty nosed know it all [thinks he is]

geordie_ben

Ok, given that HSBC state my overdraft rate is 19.9% EAR Variable, how can I calculate the daily interest?

rb10

geordie_ben wrote: »

Ok, given that HSBC state my overdraft rate is 19.9% EAR Variable, how can I calculate the daily interest?

The daily rate is approx. 0.05%, so to calculate the amount of interest accrued in any one day, multiply your overdrawn balance on that day by 0.0005.

(If you're interested, here's the Maths behind it):
I expect that you pay the interest monthly, in which case the monthly rate for the overdraft is 1.199^(1/12) = 1.524% (assuming months are of equal length, which is a good enough approximation here).

To get the daily rate, simply divide by the number of days in the month, so you are paying approx. 0.05% interest per day.

Robert_Sterling_3

Do what you suggested in your original post. :T :j :T :j :T