Help with girlfriend 'loan' figures (not a swingers add)

jeffdoran

Hi.
my girlfriend currently has a large amount of cash in a bank account earning 2.5% AER. she has kindly offered to lend me the money to pay off my bank loan and I suggested that to make things beneficial for us both why don't I pay her interest at a rate in between my bank loan (6.5% apr) and her savings interest rate.

Am I correct in thinking that with 10000 pounds at 2.5% in three years she would have
(10000 x 1.025 x 1.025 x 1.025)?

If so, the interest seems to be much larger than I would have expected when using a loan calculator to calculate the interest over 3 years at 6.5% apr. I am obviously missing something in the nuances of how loans are calculated. Could someone please kindly shed some light?

Thanks in advance. Jeff

roses

It's £288.61 per month repayment over 3 years. I used a mortgage calculator to work that out. So £10,389.96 in total.

What's the benefit for your girlfriend here if you are paying her back at the rate she gets from her bank?

KiKi

Hi there Jeff

Yes, it is 10,000 x 1.025 x 1.025 x 1.025 which is 10,768.90 altogether after three years that she earns on her savings currently.

The difference is that she is leaving her money in the account, so it's just accumulating. When you're paying off a loan you are making regular payments which means the capital amount is decreasing each month (not just sitting in the account). So the loan payment owed isn't Amount Owed x 1.065 x 1.065 x 1.065 etc.

You can't really compare savings AERs and loan APRs in the same way, as you'd have to assume that the loan APR was on the basis that you weren't making capital repayments.

I hope that helps you make sense of it; I'm not very good at explaining it.

If you're just trying to work out what you should pay her, I'd do it relatively crudely. 2.5% for her currently, 6.5% for you. So you could pay her the equivalent of what she'd get if she left her savings in her account at 4.0%.

10,000 x 1.04 x 1.04 x 1.04 = £11,248.64. Pay her that back in total, perhaps? £312.46 a month over 3 years.

She gets more, you pay less.

Hope that helps.
KiKi

DesG

If she has the money in the bank after three years she will have 10768.91 as per your calculation.

Where you are going wrong is that you will be paying back part of her 10,000 each month which she can put back in her savings, therefore as roses says 10000 over 3 years at 2.5% means you have to give her 288.61 each month.

BUT, are you not paying her back at 4%, ie half way beytween your loan rate and her savings rate? Monthly payments of £[FONT=ARIAL, HELVETICA]295.24 would be required at 4% I think.[/FONT]

Of course she could get a better rate than 2.5% if she locks the money away for 3 years, so 4% sounds fair on both of you.

Cheers, Des.

jonesMUFCforever

Never borrow or lend money to friends.
They soon become ex-friends.

jeffdoran

Thats great guys. Thanks very much for the info. Jeff

cmatt360

jonesMUFCforever wrote: »

Never borrow or lend money to friends.
They soon become ex-friends.

couldn't agree more - the most arguments i have had in any relationship has always been about money.

mikeandrach_2

i am so glad me n the mrs are as we are. i know this doesnt work for everyone, but all the money goes into and out of one account. i earn far more but spend far more, if she wants something she knows she can have it, its our money, goes towards our bills, our holidays, our lives, i know this won't work for everyone but its worked for us since we were 17 and 19, now married in mid 20's still do it the same way and still no problems at all. although i must admit, a divorce would be a catastrophe

cakinwande

Your relationship sounds great! Its what works for individuals aint it? My wages pay our bills and my partners wages goes into savings and everyday spendings and it works out good because we both earn around the same. We end off better for it and we know that everything gets paid off when its due and we are very happy with our arrangement!

I love my boyfriend very much, we are going to get our first house together but I would NEVER give him £10k, not even a family member. 1) They could just not pay it back, 2) Our relationship would be at risk if they missed a payment and they probably would because I am close and not a bank and 3) Lending that amount to anybody is just stupid.

Sorry, but thats my opinion. I would tell them to go and get a loan if they were REALLY desperate or speak to a blood family member of their own to help them out and they better have a damn good reason for asking for it in the first place. If they ran out of options and I was their only hope, I would DEFINATELY get some paper work in place.

mikeandrach wrote: »

i am so glad me n the mrs are as we are. i know this doesnt work for everyone, but all the money goes into and out of one account. i earn far more but spend far more, if she wants something she knows she can have it, its our money, goes towards our bills, our holidays, our lives, i know this won't work for everyone but its worked for us since we were 17 and 19, now married in mid 20's still do it the same way and still no problems at all. although i must admit, a divorce would be a catastrophe