Ronald Raygun said:

Yes, 12 x £160.16 = £1921.92, so that's correct.

But this is incorrect. The calculation you have probably done

goes like this:

66 x £160.16 = £10570.56 is the total payable including

£7500 repayment of capital, and therefore the total interest

over the 66 month term is £3070.56.

This means you would be paying £3070.56/66 (which is £46.52)

interest per month *on average*.

But that does *not* mean you would be paying £46.52 interest

in *every actual* month.

The thing is that at the end of each month you actually pay an

amount of interest proportional to the amount of money you owed

during that month. Since the debt gradually reduces during the

term, you are paying less interest (and more capital) each month

than in the previous month. This means you are paying more

interest (and are therefore less capital) in the early months

than in the late months.

Yes, because after a year you will not have paid off as much as

the £1363.56 you think. According to my calculations, you would

have paid off only £995.64.

Well, yes, but interest is generally specified as a rate *per year*,

so you need to divide 40.94% by 5.5 years, which gives 7.44% per year.

However, that's not the true interest rate. Consider that as you are

paying the money off gradually, the average debt throughout the term

is rather less than £7500. If the balance were to shrink linearly (it

doesn't, but it's a reasonable first approximation), then the average

debt is roughly half that, so the interest rate is roughly twice your

7.4%pa.

In your case the actual interest rate is about 1.0942% per month,

which corresponds to an APR of 13.95%.

At the rate of 1.0942% per month, once you have made 12 payments of

£160.16, your debt would have reduced from £7500 to £6504.36. The

relevant formula is:

Debt remaining after N payments = original debt * f(66-N)/f(66),

where f(x) = 1 - 1.010942^-x.

What it is, is that I'm wanting a loan for a business I want to start.

I have a (dormant) business account with my bank. I have

no security by way of mortage etc, but manage to pay off credit card

obligations. Anyway, despite my relatively weak position, my bank

would give me a loan, but it would bepersonal loan wrapped up as a

business loan.

Okay, a loan of £7.500 was chosen over a 66 month term and the following

figures were returned:

Condition: No PPI.

Monthly Repayment: £160.16

Premium: 0.00

Amount Repayable: £10.570.56

APR (%): 13.95

I can pay back the loan early.

I was hoping that if the business was successful I could arrange to pay

off the loan after one year. And I was wanting to know what the loan

interst rate would be if I paid off the loan in a year.

I did a rough calculation, I worked out that if there was no interest on

£7,500 monthly payment would be £113.63. Since I'm paying £160.16 I

figured interest paid on every payment was £46.53. £46.53 * 12 =

£558.36. So, after one year the interest rate would have been £558.36 /

£7,500 * 100 = 7.44%.

Okay, that wrong because the calculation is too simple, because the

amount loaned goes down in time. I think what happens is that as

time goes on the monthly payments remain the same, but an

increasing portion is paid as interest and a decreasing amount

is paying off the loan.

The chart I have says APR 13.95%. Anyway, what is inportant is how much

money will I have been considered to have loaned after 1 year. It's less

than £7.500. It's going to be something like (£7500 (amount of money

owed at start) + £6504.06 (amount of money owed at end of year) / 2 =

£7002.03. Now if there was no interest at all I would pay back £995.64

according to your calculation. I've paid out £160.16 * 12 = £1921.92.

So, due to interest, Ive paid out £926.28.

So, it looks to me that the effective loan is £7002.03 and I've paid out

£926.28 for the privaledge, which is an effective interest rate of

13.22%.

Not sure how you got your £995.64. Probably it was debt remaining after

N payments = original debt * f(66-N)/f(66), where f(x) = 1 -

1.010942^-x.

IOW f (66 - N)

------------

f (66)

where f(x) = 1 - 1.010942^-x.

Not sure how to use this formula.

This rate I'm sure is quite high in the present climate. I think folks

are going to say, there are better deals around. But are there. I must

Google I think.