Loans - interest calculations?

otv

Hi there,

been looking for this for a while and cant find the answer, i am looking for a calculation of how interest is worked out on a loan....

for example.. my existing (and finishing loan) with abbey the agreement says...

Loan 12000.00
interest 3469.20
total 15469.20
APR 11.0%

monthly = 257.82 over 60 months.

how is the interest worked out from these figures.

cheers
--
j.

MarkyMarkD

If the APR is 11.0%, then the interest on a monthly basis is (1.11^(1/12)-1) = 0.8735%.

So in the first month, you would incur interest of £12,000 * 0.8735% = £104.82. And you repay £257.82 = £153 of capital and £104.82 of interest.

The next month, you only owe £11,847. So you pay interest on that = £11,847 * 0.8735% = £103.48. The repayment is still £257.82, but that's £154.34 of capital and £103.48 of interest.

Each month, the capital element increases, and the interest element decreases in line with the balance.

The total interest of £3,469.20 is the sum of the interest from each of the 60 months, worked out in the way above.

The only way to prove it to yourself is with a spreadsheet or a large piece of paper and lots of calculator bashing. But there are also websites which calculate the figures.

thaylock

Not sure these numbers add up, based on these figures I have worked out the APR is approx. 6.00%. But then again, thinking about it, this would be true if the loan interest was front loaded. I would suggest the interest payable each month decreases as your loan balance decreases, the interest will change, a bit like a mortgage. I am no expert in loans, but in month 1 of your loan you will be paying £110 (11% of £12,000 / 12 monthly payments) interest, £157 capital. I would expect the amount you pay in interest to decrease slightly in subsequent months. If I am wrong I am sure somebody will post their opinion.

thaylock

Ah, just noticed from MarkyMarkD, Well, that explains it quite clearly I think.

otv

thanks for hte help so far

so how are teh monthly repayments worked out from scratch

Rafter

If you have excel, you can use a formula as follows:

To work out monthy rate from APR.....

=(1+11%)^(1/12)-1

Or to work out monthly payment from APR, number of payments and initial loan amount....


=PMT((1+11%)^(1/12)-1,60,12000,0,0)

Where 11% is the APR
60 is the number of months
and 12000 is the initial loan amount

and hey presto the answer is £257.82


if you want to do it from scratch you need to build a spreadsheet with 60 rows and the following headings:

balance brought forward
interest
payment
balance carried forward

put your 12000 is balance brought forward in month 1

interest is 0.8735% x balance brought forward

payment is £257.82

balance carried forward is balance b/f + interest - payment

balance b/f on the next row is carry forward from row above and the other formulae are the same.

You should find the balance b/f in row 60 is zero!



To calculate the payment you either need to enter numbers at random until row 60 = 0

or

you can use another excel function called 'goal seek' to find the payment amount that makes row 60 = 0


Good luck!

R.

otv

perfect, thanks

Robert_Sterling_3

The Interest Rate on a loan and the APR are not always the same.

Rafter

The APR and the interest rate are usually the same unless there is some sort of arrangement fee or other fee which gets rolled into the calculation.

There is some leeway allowed in the calculation too, so worth picking up the actual monthly rate from the loan agreement.

From the numbers provided it looks like Abbey are spot on, but you may find other providers are a bit more 'creative' with their calculations.

R.

Robert_Sterling_3

.............

breadwinners

MarkyMarkD wrote: »

If the APR is 11.0%, then the interest on a monthly basis is (1.11^(1/12)-1) = 0.8735%.

So in the first month, you would incur interest of £12,000 * 0.8735% = £104.82. And you repay £257.82 = £153 of capital and £104.82 of interest.

The next month, you only owe £11,847. So you pay interest on that = £11,847 * 0.8735% = £103.48. The repayment is still £257.82, but that's £154.34 of capital and £103.48 of interest.

Each month, the capital element increases, and the interest element decreases in line with the balance.

The total interest of £3,469.20 is the sum of the interest from each of the 60 months, worked out in the way above.

The only way to prove it to yourself is with a spreadsheet or a large piece of paper and lots of calculator bashing. But there are also websites which calculate the figures.

Could you help me here please? I'm trying to apply this to a repayment mortgage that calculates interest daily.
I have the starting balance on the day the last payment was made and know the interest rate.
How can I work out how much of my next payment is interest and how much is capital?

I wanted to use (1.11^(1/365 )-1) but got all confused.