The content of the article
- Loan interest calculation formula
- Annuity Payments
- Differentiated payments
- Which method of calculating interest is more profitable
- Interest Rate Criteria
- Calculation Methods
Before applying for a loan, it is important to properly evaluate your own financial capabilities. The amount of the overpayment depends not only on the rate of debt repayment and the established rate, but also on the system used to calculate interest on the loan.
Loan interest calculation formula
In the banking sector, there are 2 systems for determining the amount of payments: differentiated and annuity. Interest on them is different. Banks often offer their customers to choose their own debt repayment scheme. Therefore, it is important to know in advance which calculation method is more profitable..
According to this system, the size of payments is the same throughout the entire term of the loan. Annuity – equal payments to each other. The bulk of consumer loans and microloans are repaid in this way..
In the case of annuity, first all funds are used to pay interest to the bank, i.e. the first month the creditor receives the largest profit, and then the money begins to be transferred to close the main debt (loan body).
Algorithm for calculating the size of payments:
- VP = (PC? GP / 12) / (1 – ((1 / (1 + GP? 12)))(KP-1), Where:
- VP – payment amount.
- PC – initial loan amount.
- SOE – annual interest rate.
- KP – the number of installments on the loan.
Example. The client has issued a loan for 65,000 p. at 15% per annum for a period of 1 year. The value of payments for all coming months is (65000 * 15/12) / (1 – ((1 / (1 + 15/12)))(12-1)= 5866.79 p. With an annuity, simply calculate the total amount of the overpayment for the year. It is (5866.79 * 12) -65000 = 5401.48 p.
With this type of calculation, the amount of monthly tranches is constantly decreasing. For car loans and mortgages often set up a differentiated system of interest calculation. The payment consists of a fixed amount with which you can repay the loan body in equal installments, and a constantly decreasing amount of accrued interest. Loan calculation will be carried out according to the following formula:
- SP = (OZ * ST * DM) / (100 * 365), where:
- SP – interest amount.
- OZ – balance of the main loan.
- ST – interest rate.
- DM – the number of days in the selected month.
- 365 or 366 – the number of days in a year.
- 100 – the number of percent.
A fixed amount is equal to the result of dividing the loan amount by 12 months. Example. The client has issued a loan for 65,000 p. at 15% per annum for a period of 1 year. The fixed amount is 65000/12 = 5416.6 p. In the first month, the payment will be 5416.6 + ((65000 * 15 * 30) / (100 * 365)) = 5416.6 + 801.3 = 6217.9 p. When paying the second month, the loan body will decrease by 5416.6, and the installment will be equal to 5416.6 + ((59583.4 * 15 * 30) / (100 * 365)) = 6151.2 p.
Which method of calculating interest is more profitable
A citizen can not choose the type of payments when purchasing goods by installments, or making a microloan. If the borrower decided to take a car loan or get a mortgage, then they can offer him a choice of a differentiated or annuity scheme for paying off debt. Pros and cons of both methods of calculating interest:
Interest calculation method
Interest Rate Criteria
Before you get a loan at the selected bank, you should familiarize yourself with the loan conditions. When choosing a method of calculating interest, you must consider:
- The possibility of early repayment of debt. Some banks prohibit customers from repaying a loan until a certain period of time has passed. For example, if a loan is taken for 2 years, then it will be possible to repay it ahead of schedule in a year. In some institutions, closing a loan long before the end of the term is accompanied by an additional commission.
- The regularity and size of your own monthly income.
Differentiated payments are beneficial if the borrower is going to repay the loan throughout its term, because the total amount of the overpayment will be less.
If the citizen is going to quickly pay the debt, then you can choose the annuity system, because in case of early repayment, the amount of interest will be less.
A citizen should take into account that the result of independent calculations may differ from the amount received from the bank. This is due to the fact that the amount of commission, expenses for the execution of the contract, and mandatory insurance are added to payments. Their values must be indicated in the loan agreement. You can calculate a loan in the following ways:
According to the formula with manual scheduling of payments
The borrower will fully understand the interest calculation algorithm..
Using Excel Spreadsheets
It is necessary to study Excel functionality well.