Nominal vs. Effective Interest Rate


J

Jason

I have a loan that compounds interest daily. The nominal rate is 5.825%;
effective rate (by my calculations) is 5.9975%. Which value should I use
and what setting (date received vs. date due) when entering this loan in M03
to create the most accurate amortization?

Also, regarding this same loan, my lender has been charging the incorrect
interest rate (and a higher payment). This has been corrected; my principal
balance and payment going forward has been lowered (the remaining term is
the same - 18 years).

I have gone back and edited the previous 24 payments to correct the P+I -
the balance shown in Money is correct. Should I change the existing loan
terms (hopefully someone will answer Q#1 above) *or* treat this as a
refinance and create a new loan account. Which will M03 handle better and
be cleaner (I suspect the latter)?

Thanks.
 
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C

Cal Learner-- MVP

I have a loan that compounds interest daily. The nominal rate is 5.825%;
effective rate (by my calculations) is 5.9975%. Which value should I use
and what setting (date received vs. date due) when entering this loan in M03
to create the most accurate amortization?

Also, regarding this same loan, my lender has been charging the incorrect
interest rate (and a higher payment). This has been corrected; my principal
balance and payment going forward has been lowered (the remaining term is
the same - 18 years).

I have gone back and edited the previous 24 payments to correct the P+I -
the balance shown in Money is correct. Should I change the existing loan
terms (hopefully someone will answer Q#1 above) *or* treat this as a
refinance and create a new loan account. Which will M03 handle better and
be cleaner (I suspect the latter)?
Whatever you choose, I suggest letting Money compute the interest
rate while you enter the rest of the data. So if you know the number
of payments, payment size, and dates enter those.

I would make a copy of my Money file to see which works out best for
me. Care to tell us how you found the error and got them to rectify
things?
 
J

Jason

Sure...it was a student loan consolidation that offered a .8% interest
rebate upfront. I could never reconcile the P+I splits reported on my
statement with the amortization. So I did a little digging, found out what
was wrong, and ...believe it or not...they corrected pretty quick.

Another question, because the amortization in M03 is still not playing
nicely: if the final payment is different, should that be a balloon and just
reduce the term of the loan?

Thanks.
 
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C

Cal Learner-- MVP

Another question, because the amortization in M03 is still not playing
nicely: if the final payment is different, should that be a balloon and just
reduce the term of the loan?
Yes. If you have a known different last payment, then entering it as
a balloon makes sense.
 

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