The financial question: Interest computing is for many a mystery

The effects catch the eyes as soon as the transaction is “turned around”. If a private individual receives 100,000 euros today, repays the money in five years and paid four percent annually, one would think that the Euro 4000 as in the case of investment are due at year-end. But this is a fallacy, year-arrears interest payments are common only in million loans. In the normal banking business, lending rates are payable in monthly installments. The real thing is what insurers: They charge annual percentage rates in advance so that the 4000 euro must be paid immediately in one go. And here is the second time clearly that a nominal interest rate of 4 percent, in this case, is only part of the true price, because between “now” and “in a year” are 365 days, time is in this case really is money.

Delicate is the calculation of interest for loans with amortizing. From the Alps to the coast, it is quite common to an annuity for home buying. Currently cost loans with a duration of ten years, about 4 percent per year. The repayment should be 2 percent. This results in a credit of 100,000 euros in monthly installments of 500 euros that remain the same height at the fixed interest rate and are due for example at the end of the month. The two questions, how long the repayment lasts and how high the remaining debt will be in ten years, interest only a few people, but the answers again depend on the interest method, which consists in the redeemable loan of maturity, repayment settlement, and interest capitalization.

The annual rate of the return date

How this may affect the private citizen, is in a credit significantly, which should have been paid late last year: People’s Cooperative Banks consider any rate usually as full repayment. The first installment of EUR 500 hits on 31 January 2011 at the account and lowers the interest balance immediately to 99,500 euros. January interest calculates the comrades from 100,000 euros and notes the 333.33 euros on a side account. Just as they proceed in February. Net interest expense falls through the second installment on the same day to 99,000 euros. The February interest rate is determined from 99,500 euros. He is 331.67 euros and flows again to the side account. In March, the game goes into the third round. Net interest expense drops to 98,500 euros. The interest is calculated from 99,000 euros so that an amount of 330 euros on the secondary account is posted. At the same time, the bank closes on that day as well as the account. It is one of the interest that has accumulated on the secondary account, along and grabs the 995 euros back to the net interest so that the remaining debt rises to 99,495 euros. Starting in April is now 30 days, the new debt to pay interest until the Emirate lowers the interest balance again. The funny swing game – three times falling and once rising interest balance – is repeated each quarter, so that the remaining debt decreases over the course of ten years 75,312 euros. This interesting method is day-definite repayment settlement with quarterly interest capitalization.

Quite different looks annual interest date applied the major banks by the end of the eighties. Here, the customer debt also with 100,000 euros. However, unlike the cooperative banks, these institutions charge monthly rates only once, at the end of the year. Although the remaining debt amounts to only 99,833 euros after only one month of net interest remains at 100,000 euros, and it changes during the year nothing. “Remember” only at the end of the year, the banks because the customer has paid twelve installments of 500 euros and write the 6000 Euro account well. At the same time, they charge interest so that the remaining debt over time drops to 75,988 euros. So that it is 676 euros higher than that of the cooperative banks in spite of identical nominal interest rates.