How to calculate the real cost of a loan in your head!

edited 30 November -1 at 1:00AM in Martin's Blogs & Appearances & MoneySavingExpert in the News
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Former_MSE_ArchnaFormer_MSE_Archna Former MSE
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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.


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  • 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!
    Before you criticise a man, walk a mile in his shoes. Then, when you do criticise him, you're a mile away and you have his shoes.
  • daz9643daz9643 Forumite
    72 Posts
    Part of the Furniture 10 Posts Combo Breaker
    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 !
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  • MSE_MartinMSE_Martin MoneySaving Expert
    8.3K Posts
    ✭✭✭✭
    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 :)
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
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  • 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
  • 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...
  • 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...
  • fishpondfishpond Forumite
    1K Posts
    Part of the Furniture 500 Posts Combo Breaker
    ✭✭✭
    With the size & cost of calculators being so small, just pop one in your pocket.:beer:
    I am a LandLord,(under review) so there!:p
  • 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;)
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  • jago25_98jago25_98 Forumite
    623 Posts
    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.
    Order of events: Banks lose our money -> get bailed out -> were inflating GBP to cover it -> now taxing us -> next will grab your funds direct -> things get really desperate to balance the books. What should have happened?: banks go bust and we lost our money much quicker
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