Interest Rates: Everything you ever wanted to know Article Discussion

sumosumo

Many thanks grumbler.. apologies.. just forgot to show APR (APR is 5.6).

The calculation difficulty relates to my 3rd para.. in that, it is an industry standard to front-load interest in the earlier months, therefore one cannot simply divide total interest amount by days of period.

I was hoping that someone in the industry could provide the unknown 'loading' as without this the math cannot be done.

I have again called A&L who have promised to send out a factsheet, however I doubt this will provide the formula.

Thank you for your kind time.

Sincerely

grumbler

sumosumo wrote:

...The calculation difficulty relates to my 3rd para.. in that, it is an industry standard to front-load interest in the earlier months, therefore one cannot simply divide total interest amount by days of period. ...

sumosumo wrote:

...The interest on this personal loan is calculated on the basis that the borrower will be paying off part of the loan (capital) each month on your chosen term (36 months). This results in a LARGER amount of interest being attributable in the early months of the agreement than in the LATER months.....

I could be wrong, but I think you misunderstand something. No interest is front-loaded in fact. Every month interest is calculated on the current balance of your loan. Larger amount of interest in the earlier months is a result of large balance that gradually gets lower. Initially interest takes a big portion of your fixed monthly payments while the repayments of the principal are small. At the later months interest payments get lower along with the balance. As a result repayments of the principal get larger every month. The equal monthly payments are calculated in advance so that after 36 months you repay the full amount borrowed and the interest (that gets lower every month).
Indeed, all this looks like the interes is calculated and added to the loan at the beginning, then the total amount is divided by 36 giving the fixed monthly payment. However, interest added is calculated on the monthly basis not on the initial amount borrowed, but on the balance decreasing every month. The calculators recommended above give the Amortisation Table that shows for all months what portion of monthly payment is in fact interest and what portion is in fact the repayment of the principal.

I cannot explain why your APR is 5.6% while the calculators give exactly £193.25 monthly payments for £6400, 36 months and 5.5% APR (£193.54 for 5.6%). I don't think that this small discrepancy is essential for HMRC. My guess is that this is the result of the way the calculators calculate monthly rate as 5.5%/12=0.45833%. I believe that the correct calculation (probably used by your loan company) is (1+5.5%)^(1/12)-1=0.44717%. The other reason could be that the callculators assume the payments being made at the end of each month while in fact your payments are somewhen in the middle.

sumosumo

Many Thanks again grumbler. What does this symbol mean ^

What I cannot understand is why the loan providor is so reluctant to provide a formula.. they said they could not send as it was computer generated and involved about ten pages of formula.

Surely this is against FSA regulations.

grumbler

'^' means 'to the power of'. This notation is used, for example, in Excel or Google.
2^3=2*2*2=8
In Excel just type =2^3 into a cell and press 'Enter'.
In Google just type 2^3 into the 'Search' window and press 'Enter' (More about calculator.)

Surely your provider lies about 'ten pages'. I think the people you deal with are just incompentent and stupidly use ready-made software without knowing what stands behind it.

alon

Bank of Scotland have sent me some cheques I can use which they call credit card cheques. They quote an interest rate of 3.94% pa for 6 months plus a 3% handling fee. When I asked them what the apr was they said 3.94% Is that true if not what is it ?

Rafter

Nope - the APR is not 3.94%. I'm not sure they have to advertise an APR becuase it is not strictly an APR.

If they did it would be based on the interest payable beyond the promotional period plus the fees incurred in the first 12 months and assuming you repay the sum borrowed in 12 equal installments.

Assuming your standard APR is 17.9%, the APR of this promotion including the promotional interest element is 13.6%. Using the strictest possible interpretation of the advertising rules the apr would be 18.6%.

Wonder why they didn't want to advertise it!!!!

R.

jamesd

If you took the money for 6 months then paid it all off at once you would pay about 5% [STRIKE]interest[/STRIKE] on it for six months use of the money. That is, multiply the amount borrowed by 0.05 and that is what it will cost you for the whole six months. After that it would be at your normal interest rate for cheques, which is probably the cash rate.

As long as you do pay it off in 6 months and actually need the money, the cost isn't too bad compared to unsecured loans. The credit card companies rely on people not being able to pay it back and getting stuck paying higher charges.

grumbler

jamesd wrote:

If you took the money for 6 months then paid it all off at once you would pay about 5% interest on it for six months use of the money.

I just want to clarify that 5% is total interest paid for 6 months, not interest rate. Equivalent annual interest rate (for 6 month borrowing) is about 10%.

alon

Many thanks for the advise to my question about apr it has confirmed what I suspected Alon

jamesd

grumbler, yes, 5% is a total interest lump sum percentage, not an interest rate. That is, multiply sum borrowed by 0.05 to get the cost of borrowing it for the six months. Then after that you start paying the normal card rate for cheques - probably treated as cash.