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Post Info TOPIC: Loan Interest


Master Book-keeper

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Loan Interest


Client took loan out for 6k January 2018 from her bank, payable over 5 years  Interest is roughly 2k and is shown on agreement, but says it is accrued daily on outstanding loan, so would mean higher interest at the front end reducing.  Do I need to work this out, and how would I do that, or can I divide the interest by 60 to apply to the accounts?



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John 

 

 

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Master Book-keeper

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Hi John
Depending on where she got the loan from it should show the capital & interest split on the loan agreement.

Or at the very least the APR so you can work it out on an actuarial basis.

She may also have something on her Bank statements/advice from the Bank.

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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 



Master Book-keeper

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Hi Joanne

Yes, I've got the loan figure, the overall interest, and the APR (12.9%) so presumably I should work out the interest monthly based on the amount outstanding?



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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Master Book-keeper

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Hi John
Sorry for the delay. The interest is on a compounded basis, so you would need to set up a spreadsheet for that to work it out daily.

You could use the sum of digits method, but essentially they should give you about the same.

So it depends on how easy you find setting up spreadsheets. Let me know if you need the SOD method.



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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 



Master Book-keeper

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Hi Joanne

I think I've understood sum of digits  1826 days (including leap day)  x 1827  / 2  then reduce down 1 day at a time?

I've done the first 30 days, is this right?  Edited to add daily interest calculated by multiplying SOD by total interest.

I've followed it through for the 1826 days and I have an exact sum of £2043.00

sum of digits.png



-- Edited by Leger on Monday 14th of January 2019 01:00:17 PM

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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Master Book-keeper

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Hi John
Oh Im confused. I hate looking at other folks spreadsheets (especially when still got a headache from a busy weekend of booze!)

Is the £66 the interest for the first month (bottom of column D?) as that wouldnt be enough I dont think.

Also not sure where you have the 1827 days from. Sorry, I might be missing something!

For sum of digits I would be tempted to do the interest calc monthly (I know a purist would do it daly, but that would be 66000 lines of calc!)

Sum of digits works on a formula n * (N+1) / 2
n = number of months (or days if you insist).
For months this is literally the number of months ie 24 calculated as 1+2+3+4+5+6 etc answer is 300
ie using the formula 24 * (24+1) /2 = 300

Then you allocate the sum of digits to each month but kind of backwards
So interest for month 1 is calculated as 24/300 X £interest amount, say £2000 = £160 is interest in month 1

Month 2 23/300 X2000 = £153.32 is interest in month 2

Month 3 22/300 x 2000 =£146.67

Etc will show interest on reducing balance.

Hope Im making sense and my calcs are correct



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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 



Master Book-keeper

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Cheshire wrote:

Hi John
Oh Im confused. I hate looking at other folks spreadsheets (especially when still got a headache from a busy weekend of booze!) Lol I polished off my remaining 1/3rd bottle of Southern Comfort last night whilst watching the movie Skyscraper.

Is the £66 the interest for the first month (bottom of column D?) as that wouldnt be enough I dont think.  Yes, it's over 5 years though.

Also not sure where you have the 1827 days from. Sorry, I might be missing something!  365 x 5 years + 1 day for leap year, then the +1

For sum of digits I would be tempted to do the interest calc monthly (I know a purist would do it daly, but that would be 66000 lines of calc!) Sorry, misunderstood you, thought I had to do it daily 

Sum of digits works on a formula n * (N+1) / 2   60 x 61 = 3660 / 2 = 1830
n = number of months (or days if you insist).
For months this is literally the number of months ie 24 calculated as 1+2+3+4+5+6 etc answer is 300
ie using the formula 24 * (24+1) /2 = 300

Then you allocate the sum of digits to each month but kind of backwards
So interest for month 1 is calculated as 24/300 X £interest amount, say £2000 = £160 is interest in month 1   60 / 1830 x 2043 = £66.98    Harrah I have got it right, as it will be fractionally higher doing it monthly.

Month 2 23/300 X2000 = £153.32 is interest in month 2

Month 3 22/300 x 2000 =£146.67

Etc will show interest on reducing balance.

Hope Im making sense and my calcs are correct


 Thanks Joanne, your help is much appreciated.



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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Master Book-keeper

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Where in hell did I get 2 years from?

Think it was the 2 in £2k!!!

Oops, sorry John.




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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 

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