MoneySavingExpert Chair, Martin Lewis · Editor, Marcus Herbert

# How is interest calculated?

New Post Advanced Search

# How is interest calculated?

edited 30 November -1 at 1:00AM
1 reply 1K views
Forumite
3 posts  MoneySaving Newbie
edited 30 November -1 at 1:00AM
Wondering whether anyone could shed some light on how SLC calculate how much I get charged each month in interest. For example, take a random month from my statement last year:

The balance is 64,054.57 at the start of the month. They add 160.93 interest at the end of the month based on a 3.10% interest rate.
Now let's try to check this amount:
(3.1% / 365 days) * 64,054.57 = 5.44 is the interest added per day
5.44 * 29 days = 157.77
5.44 * 30 days = 163.21

So how do they get 160.93?
I've called them to try to get to the bottom of this but, predictably, they couldn't tell me what instructions the computer was following to give this result. They did tell me that interest is calculated on a daily basis, but that I should see a financial adviser if I was concerned their calculation is incorrect.

If I recalculate interest on a daily basis (in Excel), I get 157.95 after 29 days and 163.41 after 30. I've also tried using the more accurate figure 365.24 for the length of the year in days, but nothing can close this gap of about 3 pounds. Over 30 years, getting charged 3 pounds different every month is going to add up.
Is the interest calculation more complicated?

## Replies

• I've just had my letter come through and had to figure this out as well, got there in the end though.

Here's what you have to do:
1. Take your AER (Annual Equivalent interest Rate) and raise it to the power of 1/365 (365th root it) to get your daily interest rate.
2. Take your daily interest rate and raise it to the power of the number of days in the month (i.e. raise to power 30 for April)
3. Use this monthly rate for for the specific month you're calculating it for.

Worked Example:
1. The 365th root of 1.031 is 0.008364515569070360%
2. Raise 0.008364515569070360% to the power 30 (assuming there's 30 days in the month of interest) gives a rate of 0.2512400530823690% for that month
3. 64,054.57 multiplied by 0.2512400530823690 is 160.93

Another note: when checking their calculations even though HMRC pays them annually, and your statement shows one annual payment, they actually calculate the interest retrospectively as if you'd made 12 equal monthly payments. One of the few good things SLC do!

Using this I was able to calculate interest and match their calculations to within 1p over a year for my statement.

If using excel, you can calculate your daily interest rate using:
```=POWER(1.031,1/365)
```
If the above formula is in cell G7, this formula will calculate the monthly rate for a month with 30 days:
```=POWER(G7,30)
```
Sign In or Register to comment.