How to calculate the real cost of a loan in your head! 6 January 2007 at 10:03PM in Martin's blogs & appearances & MoneySavingExpert in the news 9 replies 14K views

Former_MSE_Archna

This is the discussion to link on the back of Martin's "How to calculate the real cost of a loan in your head!" blog. Please read the blog first, as the discussion follows it.

Read Martin's "How to calculate the real cost of a loan in your head!" Blog

gooismeid

Oh I am so chuffed that one of my posts got mentioned in the newsletter this week! First time ever! There'll be no talking to me soon. Anyway, the loan interest calculator is a really useful tip so I thought I'd pass on another financial tip that I find very handy.

Until my darling husband pointed out how easy it was, I always had a problem calculating VAT on things (builders' estimates are a prime example). 17.5% sounds a complicated kind of percentage, but it's really straightforward if you break it down like this: 10% of the total, then half of that amount, then half of that amount. Everyone can do 10% of a figure in their heads (I would hope...). It'll become clear if I give an example:

Amount you want to calculate VAT on: £5340
10% of this is: £534
half of £534 is: £267 (or 5% of the original figure)
half of £267 is: £133.50 (or 2.5% of the original figure)

total VAT is: 10% + 5% + 2.5%, or 534+267+133.50, or £934.50.

HTH!

daz9643

I'm pretty sure that when i took out my car loan the interest over 3 years was calculated at about £2000 and was all put on at the beginning so even if i wanted to pay it all off early i still had to pay the full amount of interest. The car salesman didn't tell me that when i asked if i could pay the loan off early !

MSE_Martin

I'm pretty sure that when i took out my car loan the interest over 3 years was calculated at about £2000 and was all put on at the beginning so even if i wanted to pay it all off early i still had to pay the full amount of interest. The car salesman didn't tell me that when i asked if i could pay the loan off early !

Aha this is almost inevitably because its a flat rate of interest - always dangerous - if you read the 'how interest rates work' article you'll see car loans broken out in there.

Martin

corbettsimon

Martin

I looked at your explanation of how to calculate interest with "interest" [sorry]. How about this as an alternative method?

Whilst there is nothing you have done wrong, here is another way of calculating which involves less maths - the answer comes out a bit higher (Interest) but is quicker to do in your head;

8% APR is compounded, convert this to a simple or flat rate (it is useful to simple / flat as they help you to work out loan payments)
8% / 2 (it just works out that way!) = 4%

Add on 0.5% for shorter loans and 0.25% for longer loans (it just works out that way) - but to be conservative add on 0.5
therefore 4+0.5 = 4.5%

£10000 * 4.5% = 450
450 * 5 = 2250 Interest on the loan
This is higher than your figure, but most loans have a document fee
It is easier to explain (maybe?)

It helps you to further work out loan repayments [see below]
Add on the 10000 = 12250
12250 / 5 (years) = 2450 (the amount payable per year)

Divide that by 12 (to get monthly payments) = £204.17
When doing mental maths, obviously this looks like
12.3 / 5 = c2500 and 2500 / 12 = 200 ish

Alternatively you can say 12250 / 60 (60 months in a year) = 204.17

corbettsimon

Concerning the VAT calculation -

How about this for a quicker way (for those who dont want to work out percentages)?

Every £1 needs to have £0.175 added on, therefore £1.175 there are no 0.5 pence any more so this would be £1.18.
Every £10 needs to have £1.75 added on, therefore £11.75
Every £100 needs to have £17.50 added on, therefore £117.50
Etc.....

If it's speed you want and dont mind rounding up for budgeting (so you will have some change) then;
Every £1 needs to have £0.20 added on, therefore you pay £1.20 (you will have 2p change!)
Every £10 needs to have £2 added on, therefore £12 (you will have 25p change!)
Every £100 needs to have £20.00 added on, therefore £120.00 (you will have £2.50 change!)
Etc...

corbettsimon

How about this for a quicker way (for those who dont want to work out percentages)?

Every £1 needs to have £0.175 added on, therefore £1.175 there are no 0.5 pence any more so this would be £1.18.
Every £10 needs to have £1.75 added on, therefore £11.75
Every £100 needs to have £17.50 added on, therefore £117.50
Etc.....

If it's speed you want and dont mind rounding up for budgeting (so you will have some change) then;
Every £1 needs to have £0.20 added on, therefore you pay £1.20 (you will have 2p change!)
Every £10 needs to have £2 added on, therefore £12 (you will have 25p change!)
Every £100 needs to have £20.00 added on, therefore £120.00 (you will have £2.50 change!)
Etc...

fishpond

With the size & cost of calculators being so small, just pop one in your pocket.:beer:

ILikeFreebies

fishpond wrote:

With the size & cost of calculators being so small, just pop one in your pocket.:beer:

Most people carry a calculator in their pocket without realising, they usually call it a mobile phone though;)

jago25_98

How I do this the opposite way in my favour?

For example, 3% a month on £10,000 for 5 years let's say, with the interest added monthly.