Results 1 to 5 of 5

Thread: Interest calculations on small and medium credit agreements

  1. #1
    New Member
    Join Date
    Mar 2012
    Location
    Heidelberg, Western Cape
    Posts
    9
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Interest calculations on small and medium credit agreements

    I am a software developer and develope software for clients .. not always knowing the specific subject matter as well as the clients.

    I have a few client that uses our loan managment software to manage their car dealerships (written specially for them at heir request and instructions). They purchase cars and resell them taking a deposit and self finance the rest of the balance.

    Up to now, they used to specify a fixed yearly interest rate, and amortize it monthly over the repayment period.

    Now they come with a request for daily interest calculations, and I can see where this comes from, if the customer paid extra capital on his loan or failed to make payment, that must reflect on the interest - either positive or negative - immediately.

    My understanding is that the yearly EAR compounded monthly is then actually supposed to be less than the EAR compounded daily ? Morally - Is this not just another way to get extra money from the consumer that is already in debt?

    Another issue ... people with debit order deductions .... how do I cater for the monthly variances when they have signed a debit order instruction? Are we allowed to adjust the amount?

    IF I do monthly compounding for instance 12 % I get an APR of 1 + (0.12/12)12 for a 28 day month and for a 31 day month which works out nicely for a fixed debit order amount every month, while on a daily compounding I get for instance 1 + (.12/365) 28 and 1 + (.12/365)30 and 1 + (.12/365)31 which is not the same.

    Any comments on this is appreciated as i am not a financial guru, and neither are my clients and I don't want to give them something which is not good for them or their clients.

  2. #2
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    On monthly vs daily calculations - you should stick to monthly calculations when instalments are paid monthly otherwise, as you say, it gets messy.

    Daily calculations should only be applied on variations, and you'd typically offset this from the last regular transaction.

    Quote Originally Posted by Riebens View Post
    IF I do monthly compounding for instance 12 % I get an APR of 1 + (0.12/12)12 for a 28 day month and for a 31 day month which works out nicely for a fixed debit order amount every month, while on a daily compounding I get for instance 1 + (.12/365) 28 and 1 + (.12/365)30 and 1 + (.12/365)31 which is not the same.
    I think you've got a problem with the calculation you're using. The advertised rate needs to be the annual effective rate of interest, so unfortunately determining the monthly rate for compound interest is not as simple as "annual rate / 12".
    The trouble with opportunity is it normally comes dressed up as work.

  3. #3
    New Member
    Join Date
    Mar 2012
    Location
    Heidelberg, Western Cape
    Posts
    9
    Thanks
    0
    Thanked 0 Times in 0 Posts
    Thanks for the feedback, unfortunately I don't have the luxury of saying if the calculations needs to be monthly or daily.

    I understand the difference between nominal and effective interest rates. In my example it should have been EPR instead of APR ... my mistake.

    an nominal rate of 12% works out to an effective rate of about 12.34%

    Kind Regards

    Ben

  4. #4
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    Quote Originally Posted by Riebens View Post
    unfortunately I don't have the luxury of saying if the calculations needs to be monthly or daily.
    Perhaps in that case make sure the client is well aware of the calculation methodology applied and signs off on it. Better still, ask them to provide it.

    I'd think the main concern is if the effective rate is misrepresented in the contract there'd be repercussions - and you wouldn't want the fingers of blame turning in your direction.

    I've attached an excel spreadsheet that converts effective to nominal and vice versa - just set the interest rate and number per annum.


    If you've got an effective rate to meet, then convert it to the nominal rate and then you can divide that by the number of calculation periods per annum.

    Or here's the relationship formula -

    Click image for larger version. 

Name:	nominal-2-effective-rate.JPG 
Views:	135 
Size:	11.9 KB 
ID:	2428
    Attached Files Attached Files
    The trouble with opportunity is it normally comes dressed up as work.

  5. #5
    New Member
    Join Date
    Mar 2012
    Location
    Heidelberg, Western Cape
    Posts
    9
    Thanks
    0
    Thanked 0 Times in 0 Posts
    great .. thanks ....

    Hope I cajn return a favour some day.

Similar Threads

  1. SME - Small and Medium-sized Enterprises?
    By allsorts in forum General Business Forum
    Replies: 12
    Last Post: 16-Feb-12, 03:06 PM
  2. [Question] Benefits or Risks of a National Register of Credit Agreements
    By Nico Jonker in forum National Credit Act Forum
    Replies: 2
    Last Post: 07-Nov-10, 10:57 AM
  3. interest on credit card
    By murdock in forum Business Finance Forum
    Replies: 14
    Last Post: 10-Oct-09, 07:20 AM
  4. Incidental credit agreements
    By Eugene in forum National Credit Act Forum
    Replies: 2
    Last Post: 05-May-09, 10:39 AM
  5. Incidental credit agreements
    By Dave A in forum National Credit Act Forum
    Replies: 14
    Last Post: 25-Sep-06, 05:59 PM

Did you like this article? Share it with your favourite social network.

Did you like this article? Share it with your favourite social network.

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •