Littlewoods - Interest Calculation.

Edmond_2

So I've opened up a Littlewoods account and placed my order and am building a little spreadsheet to track it. Trouble is, I can't make sense of the interest charges they've put on.

I've gone for the 156 week option at 39.9% rate. From doing a bit of googling, I understand that there is simple interest and compound interest. I'm sure it isn't compound interest, so it must be simple interest. Everywhere I look gives the same calculation for simple interest - PxRxT, where P is the principle (I.e. amount borrowed), R is the rate and T is the time the money is borrowed.

I'll use an example amount on one of the items on my order. Item price was £12 so 12 x 0.399 x 3(years) = £14.36 interest. The amount of interest on the statement for that item is £7.29. It's not simply 39.9% of 12 either, as that's £4.79. Compound interest would of course be far too much as well.

I'm stumped. I'm sure they didn't just pull that figure out of their !!!, so how in earth are they getting it? I can't find any info on their site at all.

Another related question - with the 156 week option, is the interest reduced if you top up your account on top of monthly payments? If the answer is yes, then I need to calculate the interest in my spreadsheet. If not, I guess I could just input the total amounts from my order, but it's still frustrating not knowing what makes up the interest!

bigadaj

First of all that's an expensive way if borrowing so look at alternatives or even saving up.

The problem with your calculation is that your paying it back over that time, so the full balance exists at the beginning and there is zero balance at the end. Therefore you approximately have half of the balance through the period on average, which given their interest is about half what you've calculated is about right.

This thing is often taken advantage of by car dealers, as the apr reflects the rate you're paying on the sums borrowed, they often quote flat rate as an easy calculation but it effectively means your paying interst on money you have already paid back. It makes the sums nominally easier, but is less honest, in your example the flat rate would be around 20%.

thebritishbloke

Oh my days, 39.9%?!

Can you not get accepted for a credit card with an ~18.9% limit? You'll save an absolute fortune in the long run.

You're financing things that cost £12 and more than DOUBLING the cost of it just to finance it! Honestly, do not do this.

Firstly, look to see if you qualify for any 0% purchases credit cards. You won't get one that lasts for 3 years, but you could get one for 18 months. Failing that, just get a normal ~18% card and you will save an absolute fortune. If you can't get accepted for that, then you shouldn't be borrowing money from Littlewoods.

Edmond_2

bigadaj wrote: »

First of all that's an expensive way if borrowing so look at alternatives or even saving up.

The problem with your calculation is that your paying it back over that time, so the full balance exists at the beginning and there is zero balance at the end. Therefore you approximately have half of the balance through the period on average, which given their interest is about half what you've calculated is about right.

This thing is often taken advantage of by car dealers, as the apr reflects the rate you're paying on the sums borrowed, they often quote flat rate as an easy calculation but it effectively means your paying interst on money you have already paid back. It makes the sums nominally easier, but is less honest, in your example the flat rate would be around 20%.

Ah, so I'm paying 39.9% on £12 on year 1, then 39.9% on £12 minus what I've paid back so far in year 2, etc. That makes sense - just need to see if it sums to the same amount as Litlewoods.

I realise the rate makes the products expensive overall, but I'm working off monthly periods. Paying £15 a month for an extra year or two is less of a burden than paying a greater monthly amount, or buying the products outright. The overall cost is sort of irrelevant - not having to pay £15 in a years time doesn't help me on a month to month basis, whereas not having to pay £60 a month right now does. Hope that makes sense!

InsideInsurance

For a lot of items Littlewoods is also an expensive price to start off with so compounding that with interest makes it even worse.

Even if you got a sub prime credit card with a similar APR you'd pay less by being able to get the product cheaper to begin with

CLAPTON

Edmond wrote: »

Ah, so I'm paying 39.9% on £12 on year 1, then 39.9% on £12 minus what I've paid back so far in year 2, etc. That makes sense - just need to see if it sums to the same amount as Litlewoods.

I realise the rate makes the products expensive overall, but I'm working off monthly periods. Paying £15 a month for an extra year or two is less of a burden than paying a greater monthly amount, or buying the products outright. The overall cost is sort of irrelevant - not having to pay £15 in a years time doesn't help me on a month to month basis, whereas not having to pay £60 a month right now does. Hope that makes sense!

no, it makes no sense and is absolutely stupid

save then spend ; quite simple and will save you a fortune over the years.

grumbler

Edmond wrote: »

...I'm working off monthly periods. ...The overall cost is sort of irrelevant ...

This is a great delusion, pretty common though.

Edmond_2

I still can't get the calculation to work.


Let's stick with £12, as it's easily divisible by 3.


So I've borrowed £12 in yr 1, £8 in yr 2, and £4 in year 3, which gives £4.79, £3.19, and £1.60 interest respectively, which sums to £9.58.

thebritishbloke

Please shop around for whatever it is you're looking to buy. Littlewoods is generally more expensive than anywhere else. Even buying it elsewhere on a standard credit card would save you so so so much money!

grumbler

Do you pay monthly? If so and for equal monthly payments:

Monthly rate (Excel notation):

=(1+39.9%)^(1/12)-1

2.8375%

Monthly payment:

=PMT(2.8375%,36,12)

£0.54

Total amount paid £0.54*36=£19.31. Total interest £7.31

For equal yearly payments:
=PMT(39.9%,3,12)
£7.54. In the first year it's £12*39.9% interest; the rest reduces the balance. Do the maths yourself for the second and the third year.

£22.63 - total amount
£10.63 - total interest

CLAPTON

Edmond wrote: »

I still can't get the calculation to work.


Let's stick with £12, as it's easily divisible by 3.


So I've borrowed £12 in yr 1, £8 in yr 2, and £4 in year 3, which gives £4.79, £3.19, and £1.60 interest respectively, which sums to £9.58.

no you haven't borrowed 12 in year one

each monthly payment is part interest and part capital repayment ; so the amount you owe (on which the interest is based) reduces each month and not each year


why don't we improve maths at school.