How to determine the cost of credit
Posted on Sep 6, 2000 08:15:27 AM
The cost of the loan – the amount that the borrower must pay for credit.
The bulk of the cost of credit – part of the cost, which is paid directly to the lender.
More fraction of the cost of credit – part of the cost, which comes to others. The price of the delivered goods may also include hidden elements of the cost of credit, lenders compensate for reduction of the nominal interest rate.
The loan amount is added to the account of the following components:
– Interest rate;
– Commitment fees: 0.1-0.3% per annum payable to the bank-creditor for the obligation to reserve and provide the necessary loans to the borrower within a specified period;
– The management fee: 0.1-0.3% is paid to the bank manager, who spends the organizational work in lending to several banks;
– Insurance premiums;
– Various charges.
Deadline for bank lending is defined taking into account the chosen program. Increase it is not possible, and reducing the sometimes acceptable if lets your ability to pay. Rate of the loan and the bank is defined and discussed with the recipient of the loan is not subject. Perhaps the price of credit is not reduced, even with very low rates of banks. This should alert you, because the bank never loses their income. Surely, the income of the bank get its attendant credit services. There is a reason to specify them. If we are talking about supposedly “free loan” to buy, such as household appliances through the shop, with whom the bank has a cooperation agreement, the interest-free loans will not happen. Banks are not patrons of the arts and the price of credit is already incorporated in the price of the goods. This is easily verified on the cost of identical goods in a nearby store.
The calculation of interest on the loan may be made by three methods:
Monthly repayment of the loan with interest payments;
Annuity payment;
Lump sum repayment of the loan with periodic interest payments.
As an example, to calculate interest on a loan taken from the following:
loan amount – 1000 units. (PV-initial loan amount or current at the time of calculating the loan amount)
loan term – 12 months (n – number of months)
interest rate loans – 20% “per annum”
monthly interest rate of the loan – 1,67 (rate – the monthly interest rate, 1 / 12 of annual)
Method 1 – The monthly repayment of the loan with interest payments. By this method, the calculation of the loan include a monthly return of a predetermined one and the same part of the loan and the monthly interest payment. The magnitude of the next payment loan is defined as:
V = pV / n
The magnitude of the next payment of interest determined by the formula:
I = pV * rate
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