Monthly repayments (2K3)

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Right from the start of this question I have a complete dyslexia when it comes to accounting, so be gentle. I’ll use fictitious figures for this example

I wish to get a loan out and want to make repayments over a 3 year period, loan

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The financial functions in Excel are correct, as far as I know, but a) there is some ambiguity as to how interest is calculated, and banks do not always keep strictly to the mathematical rules.

Keep in mind that if you pay monthly, the number of periods has to be in months and the interest rate too.

If you repay monthly at a yearly interest rate of 8%, one way of calculating the monthly interest rate is simply 8% / 12 = 0.666…%. But since interest is cumulative, that results in an effective interest of more than 8%. The effective interest can be calculated as follows: the monthly multiplication factor is 100%+8%/12 = 1.0066…. This leads to a yearly multiplication factor of 1.00666…^12 = 1.083. The increase is 0.083 or 8.3%.
You can use the same method to calculate the monthly interest that results in an effective interest of 8% yearly: the yearly factor is 1.08, thus the monthly one is 1.08^(1/12) = 1.006434. The increase is 0.006434 or 0.6434%.
Now it depends on which method the bank uses to determine the monthly interest rate…

You can also use RATE Function with the figures provided by the bank to calculate their “real” interest rate.

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OK, take a deep breath

I can work out the monthly increase as (8%/12)=0.666 and the increment is *1.666.

Copying this down I can say that without repayment the amount increases to

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OK , I told you I never understand accountancy, a mental block

I calculated the monthly installments using PMT and then tried to see it as a reduction over 36 months. I want to do this so that I can put lump sums to pay i? off quicker. Why am I getting negative amounts towards the end/

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You weren’t including the interest that the bank would have been charging

See the attached….

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Thanks Dean

That makes sense, I tried something similar but did not split it into a different column and hence got mucked up

This is great

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Hi Jerry. In addition to Hans’ answer, does this help. Scroll down the page to the Excel bit.

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Thanks Rob

I decided to grit my teeth and go through the PMT function ( I have a habit of over analysising like I do in Puzzles ).

I get irritated that I can make a calculation and it differs from the banks quote by about 50 pence per month in the banks favour, this is why I have difficulty in beliving this function is correct or if, as Hans says, they calculate it differently.

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