Loan calculation formula: types of debt repayment

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Lending in our time is hardly something out of the ordinary. Consumer loans for the purchase of goods, credit cards, short-term loans have become commonplace. If you look at the West, all of America lives on credit, and the IMF generally provides loans to entire states. But let's look at the practical point of view of lending to the average consumer. The most important thing here is the formula for calculating the loan at the conclusion of the contract, which many borrowers in most cases do not pay attention to. And this may play a cruel joke on them in the future.

Formula for calculating the loan payment: basic knowledge

Before giving the mathematical equations themselves, a few concepts should be clearly defined. The most important thing in any loan agreement is the repayment of the body of the loan, that is, the reimbursement of the initial loan amount in full.

But it's easyso no bank or financial institution gives money. They, at a minimum, require for this to pay interest for the entire period of using the loan. By the way, if anyone does not know, this technique was adopted by the Templars and Masons.

But that's not all. The modern formula for calculating a loan implies the elimination of risks associated with a hypothetical non-payment by the borrower of the funds established by the schedule. Therefore, additionally, insurance, reservation, etc. expenses are included in loan agreements.

In fact, the formula for calculating a loan in terms of repaying the main debt, if it is made in equal installments, may look like the total loan amount, broken down monthly, that is, S / n, where S is the loan amount in its initial form, and n is the number of months (not years).

If we start from the monthly payment, taking into account the number of days in a year, the loan calculation formula takes on a new look. The loan amount is divided by the total number of days for the full term of its use, and then multiplied by the number of days in the current month.

For example, a month can have 30, 31, 28 or 29 days. Accordingly, the entire loan amount is divided by the number of days, and then multiplied by the number of days in the current month.

How interest can be calculated

The formula for calculating interest on a loan is somewhat similar to the above example. It is believed that the borrower pays interest only for the established period of using the loan (day, week, month, year). The percentage is calculated in different ways. It may depend on the number of daysfixed term or be fixed (in this case, the payment of interest is similar to the repayment of the body of the loan).

However, if you follow the generally accepted rules for paying interest over the full term of the loan, the formula will look like dividing the loan amount by the total number of days in the term, followed by multiplication by the percentage and the number of days for which you need to pay.

Some banks offer payment at the end of the term. Again, the calculated amount of interest is broken down by maturity with fixation.

But one of the most interesting and attractive marketing methods is the accrual of interest on the balance of the main debt. Thus, the formula for calculating the loan (the body, although it is repaid ahead of schedule) remains unchanged, but the faster the principal debt is repaid, the less interest the borrower overpays. In this case, the delta of the total and paid amount is divided by the remaining total number of days and multiplied by the percentage and the number of days corresponding to the current repayment period. But some banks impose pen alties for this. And this is understandable, because they are losing profits.

The formula for calculating an annuity loan payment: what is the point?

Annuity loans are classified as differentiated. In this situation, all payments related to the principal debt are repaid in equal installments. There are two types of redemption: numerando and postnumerando. In the first case, the mainpayments are made exactly on time or at the end of the period. In the second - earlier than the scheduled date (as in the case of early repayment).

And the payments themselves of this type can be fixed, pegged to the exchange rate, indexed to inflation, urgent, perpetual, inherited, etc. The formula for calculating an annuity loan can be shown in the simplest example.

Let's say the loan amount is 100 thousand rubles, the annual rate is 10%, and the loan term is 6 months. The monthly payment will be 17156.14, but the interest will decrease. To calculate the total overpayment at some time, you just need to multiply the amount of the loan body by the number of months and minus the total loan amount. In our case it is 17156, 146-100000=2936, 84.

Hidden clauses of loan agreements

It is worth mentioning separately that the contracts may also contain clauses related to credit risk insurance. They need to pay special attention.

Commissions may be paid in advance or may be spread over time, which may incur additional costs when determining the amount of the same monthly payment. There are also various kinds of commissions, for example, for issuing cash, for servicing a credit card, for SMS notifications for transactions, etc. But all this also costs money, and for some reason no one really thinks about these costs.

Repayment orderdebts

If there is a delay, the procedure is as follows: first of all, overdue interest is repaid, in the second - the overdue principal payment, then - interest and pen alties. If at the moment there is another debt, it is repaid after the overdue one, and the pen alty is the last one.

Conclusion

As you can see, the formula for calculating a loan may change depending on the situation. But the most important question is that it is not worth climbing into such bondage, even on the most favorable terms. No matter how attractive all this is, no financier will miss the opportunity to earn. And, as a rule, including hidden fees and the state of financial markets, the average person will lose in any case.