

Subject:
Calculating precomputed interest
Category: Business and Money > Finance Asked by: bubba15ga List Price: $25.00 
Posted:
04 Sep 2005 07:40 PDT
Expires: 04 Oct 2005 07:40 PDT Question ID: 564157 
I am trying to fiqure out what the calculation would be when borrowing money on a precomputed interst basis. The discount is 9.50%/100 per year of the total note and service charge is total note/50*$1.50. the loan is to be paid in 12 equal payments. Example amount given to customer 500.00 for 12 months. I know the discount or int would be 47.50 and the service charge would be 15.00 but this is on the amount given to customer, not on the total note which would be amount given to cust + int +service charge which equals 562.50. I can not figure out how to start with the total note to get the interest amount and service charge. Thank you for your help  
 


Subject:
Re: Calculating precomputed interest
Answered By: elmartoga on 05 Sep 2005 07:12 PDT Rated: 
Hello bubba, Your question can be answered with a simple mathematical equation. First let me redefine the "service" fees you mention. If this charge is $1.50/50*note, then this is the same as $0.03*note. This, in turn, means that the service charge is 3 cents per dollar; or in other words, 3% of the total note. Now, on to the formula. You stated that you want the customer to borrow money equal to $500 plus the int+service charges on the total note. So let's call "X" to the value of the total note. If the loans is for 12 months, then the costs associated with this loan will be: costs = 9.5% of X + 3% of X = 0.095*X + 0.03*X = 0.125*X Now, if the total note must cover $500 plus its costs, then we have that: X = $500 + "costs of borrowing X" X = 500 + 0.125*X And now we must simply isolate X to get the answer: X = 500 + 0.125*X X  0.125*X = 500 X*(10.125) = 500 X*0.875 = 500 X = 500/0.875 X = 571.42 (rounded) So the value of the total note should be $571.42. Let's verify that this is correct. If you borrow $571.42, you will have to pay a service charge of 0.03*571.42 = $17.14; and interests of 0.095*571.42 = $54.28. Therefore, the total cost of this loan will be 17.14+54.28 = $71.42. So, as you see, the customer will receive $500 plus the $71.42 needed to cover the costs of the total note. The formula I provided can be easily adapted to other amounts (instead of $500) and other interest and service fees. If you need to adapt it and have any trouble with it, or if there is anything unclear about my answer, please don't hesitate to request clarification. I hope this helps! Best wishes, elmarto  
 

bubba15ga
rated this answer:
and gave an additional tip of:
$10.00
Elmarto answered my question quickly, precisely and perfectfully. I could not have asked for anything better. 

Subject:
Re: Calculating precomputed interest
From: myoaringa on 05 Sep 2005 09:08 PDT 
I am glad that you two seemed to have agreed on the terms, but I don't see where the 12 regular and equal payments are reflected, which will reduce the interest amount. To me, it seems that the problem is confused by speaking of a "note", which for bankers suggests a one time final settlement of the debt. Similarly, the mention of "discount" suggests that the amount due at final maturity is know and the amount to be paid is what is being calculated. If I understand the problem correctly (which may not be true), the borrower receives $ 500 and must also finance the $ 15 service charge, which the lender pockets upfront, so the debt is for $ 515. Interest will be calculated at 9.5% per annum, and the loan settled by 12 equal payments. Let's assume 12 monthly payments due at the end of each period, just to be ultra precise. Then the financial calculation is to determine what amount the 12 equal payments must be at 9.5% interest to settle the loan plus service charge (= $ 515). My trusty HP12c calculator tells me that this is $ 45.157 per month, a total of $ 541.884. This is less than the $ 571.42 in the answer because the debt is being reduced each month, reducing the amount on which interest is due in the subsequent months. If the same loan is to be repaid over 24 months, the payments would be $ 23.646, a total of $ 567.50, more than before because the loan would be outstanding for a longer period of time. Here is an site with online calculators: http://homebuying.about.com/cs/calculators/a/calculators.htm Click on "what's missing" and then on "what will be my monthly payment", and then enter the interest rate (9.5), period (1 year), and amount (515), and hit "calculate". If I have misunderstood the definition of the problem, please let me know. Myoarin 
Subject:
Re: Calculating precomputed interest
From: myoaringa on 05 Sep 2005 14:37 PDT 
Bubba, Regardless whether my calculation is correct or not, I think someone in the consumer loan business should have a handle on the numbers. You don't have to know how to calculate interest and payments with a slide rule, but should know how to use software that gives the right answers. They are too easy to check these days. Truth in Lending Laws can be a nuisance. Here is another site with some software: http://www.programurl.com/loanandmortgage.htm Myoarin 
Subject:
Re: Calculating precomputed interest
From: bubba15ga on 05 Sep 2005 16:13 PDT 
Myoarin For your information, I am quite capable of verifying that interest charged and service fee charged are correct and in compliance with my particular state laws. Your calculation was incorrect due to the simple fact that the term precompute means that the interest and service charge are added at the begining and the loan begins with the total of payments, this is not a simple interest type of product. I am not nor do I claim to be a mathmetician, I was simply looking for help with the formula to arrive at the totals. The consumer finance business involves way more important things than being able to figure out a formula, such as the ability to read and understand people, because it is easy to lend money out, but it takes a unique person that can get it paid back. I have been very successful over the past 10 years in this business, and now own 3 independent offices, and I do have a handle on the numbers. We are considering a change in software companies and was simply trying to assist them with the programming of the formula. Respectfully Bubba 
Subject:
Re: Calculating precomputed interest
From: myoaringa on 05 Sep 2005 17:40 PDT 
My apologies, Bubba, and my congratulations on your success. I obviously misunderstood that with the terminology you use it is acceptable to charge interest on an amount plus service charge that is not received by the customer. "Therefore, the total cost of this loan will be 17.14+54.28 = $71.42. So, as you see, the customer will receive $500 plus the $71.42 needed to cover the costs of the total note." (Elmartoga) I understood that the customer would receive $500, plus owing you $15 service charge. If he repays you the $571.42 ("total note") in 12 equal monthly payments of $47.62, that represents an interest rate of 19.64% pa. More congratulations! Tell me where I went wrong, please. Myoarin 
Subject:
Re: Calculating precomputed interest
From: elmartoga on 05 Sep 2005 17:52 PDT 
Thank you very much for the nice comments and tip! 
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