8% interest vs compound interest

[too strong]

Here, below is the reason the Banks keep making hefty profits at the cost of

the consumer.

 

Just finished totalling up my interest costs on an account I am claiming back on.

 

This is an account I have held since about 1999 but the totals are only for the last six years.

 

--------------------------------------------------------------------------

charges-------8% interest--------27.5%interest------27.5% compounded

--------------------------------------------------------------------------

2100 -----------535.39 ---------------1611.25 ---------3205.69

--------------------------------------------------------------------------

totals---------- 2635.39 --------------3711.25 ---------5305.69

--------------------------------------------------------------------------

 

 

 

I cannot remember who said that

 

"compound interest is the eight wonder of the world",

 

but now I know what he meant.

[Mindzai]

So does the spreadsheet calculate compound interest?

[too strong]

So does the spreadsheet calculate compound interest?

 

 

No.

 

What I have done is found an online calculator which allows you to put in details such as charge date, present date, and % rate. The site even gives the choice of how you want it to be calculated i.e. weekly, monthly or yearly.

 

The one I used is :-

 

Compound interest calculator

 

The only downside is that you have to do it for every charge individually which is time consuming but worth the effort.

[BaldyBaldwin]

you are right, it is time consuming; but you are also right, it most defineatly is worth it.

brilliant find, cracking website

[too strong]

you are right, it is time consuming; but you are also right, it most defineatly is worth it.

brilliant find, cracking website

 

 

I've had to go through exactly 218 charges on 3 accounts tonight.

 

This also included writing 5 letters and emails as well.

 

It's been a long evening, soon time for bed.

[crashbandicoot]

Good luck with this Too Strong, I'm also going to attempt to reclaim my charges plus compound interest so it'll be interesting to see what happens

[too strong]

Good luck with this Too Strong, I'm also going to attempt to reclaim my charges plus compound interest so it'll be interesting to see what happens

 

 

I really don't see how the banks can complain as compounding is the banks method of applying interest.

 

There also doesn't seem to be a standardised way of applying interest as far as I can see so I will go for the compound way.

[Mindzai]

Actually the spreadsheet does compound interest, but not in the way that the online calculators (and presumably the banks) do. I have made a spreadsheet which does calculate compound interest in this way which I can post if required. It works the same as vampiress', ie you just enter some basic info such as charge amount, date etc and it will compound the interest using that method.

[too strong]

Actually the spreadsheet does compound interest, but not in the way that the online calculators (and presumably the banks) do. I have made a spreadsheet which does calculate compound interest in this way which I can post if required. It works the same as vampiress', ie you just enter some basic info such as charge amount, date etc and it will compound the interest using that method.

 

 

I was just about to put my claim on the moneyclaim site when I thought I'd better double check how the interest should be calculated on another website. It would seem that the way that it should be calculated is on a daily rate i.e. @8%

(I will be claiming contractual interest)

(8/100)/365days = 0.00022.

0.00022*the amount gives the daily rate.

 

If this is the way it should be calculated then this is the way it should be done.

 

The way I was going to do it was by compounding the interest. Would this not give the banks something to pull the claim apart in court or would the judge just reduce the interest as the charges themselves would still stand?

[Mindzai]

I was just about to put my claim on the moneyclaim site when I thought I'd better double check how the interest should be calculated on another website. It would seem that the way that it should be calculated is on a daily rate i.e. @8%

(I will be claiming contractual interest)

(8/100)/365days = 0.00022.

0.00022*the amount gives the daily rate.

 

If this is the way it should be calculated then this is the way it should be done.

 

The way I was going to do it was by compounding the interest. Would this not give the banks something to pull the claim apart in court or would the judge just reduce the interest as the charges themselves would still stand?

 

Well as they compound interest themselves they'd have a hard time complaining about it to a judge. And to work out the daily rate the actual calculation is:

 

(1+APR)^(1/365)-1 which in the case of 8% is indeed 0.00022 when rounded.

 

The spreadsheet in my sig will work out the interest on your charges for you using this method.

[too strong]

Well as they compound interest themselves they'd have a hard time complaining about it to a judge. And to work out the daily rate the actual calculation is:

 

(1+APR)^(1/365)-1 which in the case of 8% is indeed 0.00022 when rounded.

 

The spreadsheet in my sig will work out the interest on your charges for you using this method.

 

 

The example above seems to be just dividing the 8% evenly over the year not compounding it.

[too strong]

Just cut and paste my charges and dates into your excel worksheet and your figures came out different to my own.

 

The difference between our figures are that I had compounded on a monthly basis and you had compounded on a yearly basis.

 

The reason I had done it monthly was that the banks bill our accounts on a monthly basis.

 

Just trying to decide which version to go with.

 

Your excel worksheet is excellent by the way.

[Mindzai]

Hi too strong

 

The example above seems to be just dividing the 8% evenly over the year not compounding it.

 

That is just the formula for calculating APR on a daily rate, not applying compound interest to a charge. However it isn't dividing it evenly over a year, it is using the 365th root of the APR. Rounding to 4 decimal places, in the case of 8%, gives the same result as dividing evenly though. The formula used in the spreadsheet to apply this daily rate to a charge is:

 

CHARGE_AMOUNT * (1 + DAILY_RATE)^DAYS_SINCE_CHARGE

 

The difference between our figures are that I had compounded on a monthly basis and you had compounded on a yearly basis.

 

The reason I had done it monthly was that the banks bill our accounts on a monthly basis.

 

The spreadsheet I made compounds interest on a daily basis and a monthly basis (depending on which tab you use). Yearly compounding would be way to infrequent in our circumstances.

 

You have to bear in mind that monthly compounding will not match daily compounding for two reasons, firstly daily compounding is done every day and so will be more precise than compounding done every month, and secondly that unless you have gone into a lot of fine detail, monthly compounding does not account for the time of the month the charge was debited. So if you were charged £20 on the 10th of the month, most people's method of monthly compounding will just compound the £20 for the whole month rather than the month - 10 days. Although I wouldn't be surprised if this is also how the banks work!

 

Another reason for differeing calculations is the decimal precision to which different spreadsheets and calculators work, so you probably wont often see 100% identical results using different methods - there is room for some deviation. Really every method i've seen including Vamp's sheets, online calcs etc all produce perfectly acvceptable results, its just whichever one you find most convinent to use really. The main point in me creating my one was to make it as printer friendly as possible whilst using the root method.

[Spiceskull]

Just a quick query from me (shock horror and gasp!) - what frequency are you guys applying when compounding the interest?

 

It seems to me that the banks apply it monthly - O/D in one month is charged interest, thus making the O/D higher for the next month when interest is applied again, a proportion of which is compounded from the previous month.

 

All other factors aside it would appear that the sensible option is to compound at the same frequency as the bank's 'billing cycle' as appears on your statements.

 

The other consideration is that if you are coing to compound interest on the contractual rate, it would be prudent to use the bank's actual rate as it was at the time, rather than a blanket application of the current rate...what are your thoughts on this?

[Mindzai]

Just a quick query from me (shock horror and gasp!) - what frequency are you guys applying when compounding the interest?

 

It seems to me that the banks apply it monthly - O/D in one month is charged interest, thus making the O/D higher for the next month when interest is applied again, a proportion of which is compounded from the previous month.

 

All other factors aside it would appear that the sensible option is to compound at the same frequency as the bank's 'billing cycle' as appears on your statements.

 

Well there are a couple of considerations in my previous post to bear in mind with monthly over daily compounding.

 

The other consideration is that if you are coing to compound interest on the contractual rate, it would be prudent to use the bank's actual rate as it was at the time, rather than a blanket application of the current rate...what are your thoughts on this?

 

You may have a point, but to argue this the bank would have to go to court and let a judge decide, so you are pretty safe using their current rate. They can hardly claim it's unfair after all.

[Spiceskull]

You may have a point, but to argue this the bank would have to go to court and let a judge decide, so you are pretty safe using their current rate. They can hardly claim it's unfair after all.

Very true - but you must remember that a court will not look favourably on a claim that looks like it is profiteering. A diligent attemt to get the most accurate figures for your claim, whilst being contested by the bank, will look like a reasonable effort to right a wrong.

 

Of course, anything that the bank does to us is fair game when the boot is on the other foot, and this is why I feel it is important to use exactly the same deck and rules as the bank.

 

That said, it is highly unlikely they would defend any but the most ludicrous claims...

 

Anyway, once my 6+ years DPA request has finally been fulfilled, I will re-do my LBA using the bank's contractual rate at the relevant dates, and also compounding the interest for the icing on the cake...

[Mindzai]

You definitely have a good point. The thing is though, the Judge knows we are lay-persons and I don't think they would look unfavourably on the discussed methods. As long as you said 'if you bank are unhappy with my calculations they can provide more accurate ones (as long as they ARE accurate!)' I don't think it would be a problem.

[Spiceskull]

LOL...all different methods that have yet to be proven. Still, one will work, and when it does everyone can jump on the bandwagon...

[too strong]

Quick question Mindzai,

 

when I enter a rate of 36% into your worksheet why does the daily rate become 2.05%?

 

I thought it would be 3%.

[Mindzai]

Ive just tried it and it comes out 2.6% (monthly though not daily). Can you re-download the version in my sig (should be 1.2) and try again please? It may have been an error in an early version.

 

Remember you cant just divide the APR by 12 to get the daily rate. Say you had a £100 debt and a monthly rate of 2%. In Jan you would add on the monthly rate of 2% and get a total debt of £102. In feb though, you would have to pay 2% interest on £102, as you need to include the previous interest when compounding. After a year, your actual debt is £126.82, hence you have paid an annual rate of 26.8%. Obviously this is different from just mintilplying the monthly rate by 12 months which gives 24%.

[too strong]

Ive just tried it and it comes out 2.6% (monthly though not daily). Can you re-download the version in my sig (should be 1.2) and try again please? It may have been an error in an early version.

 

Remember you cant just divide the APR by 12 to get the daily rate. Say you had a £100 debt and a monthly rate of 2%. In Jan you would add on the monthly rate of 2% and get a total debt of £102. In feb though, you would have to pay 2% interest on £102, as you need to include the previous interest when compounding. After a year, your actual debt is £126.82, hence you have paid an annual rate of 26.8%. Obviously this is different from just mintilplying the monthly rate by 12 months which gives 24%.

 

Ahh, so what you are saying is that the 36% yearly is 2.6% compounded monthly

[Mindzai]

Ahh, so what you are saying is that the 36% yearly is 2.6% compounded monthly

 

Yep thats right I found it a difficult concept at first. I'm by no means a 'maths-person', this had to be explained to me at great length by someone who is, but it all clicked into place eventually!

[too strong]

Yep thats right

 

I don't even think most people would have thought of that.

 

When I used the online calculator it just asks for the interest rate, so I put in 36%.

That is why my figures came out higher than yours because I think it was using the 3% per month.

 

As percentages can be so difficult to calculate and understand for most people do you think doing it one way or the other can be detrimental to someone's claim?

[Mindzai]

Well I don't know the legalities, but the judge knows you are not a professional accountant. It is up to the banks to provide a more accurate figure is they want to contest it. I'm sure the judge would have to be very harsh to hold it against you to be honest.

[BaldyBaldwin]

is there a spreadsheet for credit cards??