8% interest vs compound interest

[too strong]

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.

 

Thanks for your help, you have cleared things up in my mind.

Just hope everybody reads these posts and it does the same for them.

 

I will be entering my moneyclaim using the values on your spreadsheet.

 

Thanks again.

[em-bobs]

Hi all....

 

Sorry to slightly highjack this post - but it's all relevant.

 

I get the maths behind compound interest et al, but can we charge the banks compound interest at an equivelant rate to their own, on the charges they inflicted at the prelim stage? I've been scouring the forum for the past hour and a half, and have only come up with conflicting answers....

 

Help appreciated! xxxxx

 

Oh - and just a funny note.... I sent a postal order with my S.A.R - (Subject Access Request) request - and the bank has just charged me an additional £5 for the statements. Total £15 - a river above the max. how rude.

[Mindzai]

You can charge them contractual interest from the day the debit the charge to the day you get it back. I have a feeling ive misunderstood the question though?

[em-bobs]

You can charge them contractual interest from the day the debit the charge to the day you get it back.

 

That is the exact sentance I have been looking for Many thanks

 

I have a feeling ive misunderstood the question though?

 

What I understand from your statement is that we can charge the banks interest (as well as re-claiming interest they have charged us).

 

As long as we are ok to do this at the prelim letter stage - that is cool. Natwest's rate is currently something like 17.4%, at the start date of my claim (07/00) it was £14.99% - so I was going to calculate the interest I am charging on unlawful charges incurred at 16% on a monthly basis using a compound calculator. this all seem Ok???

 

I'd just feel better if I had another opinion from my own.

 

love this site. love you all. will show my appreciation financially when i get me big fat cheque!

[Mindzai]

Yes, not are only are we OK to do tell them at the prelim stage, that is what we SHOULD be doing. Unlike them we have nothing to hide ater all.

 

Personally, and remember this is just my personal opinion, I'd just charge them 17.4% on the whole amount. However I'm sure others may disagree

[em-bobs]

YAY! May do.... I sleep on it - though prelim letter will go out tomorrow...

 

x

[tim2718281]

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.

 

IIRC, in the book it says that statutory interest is to be calculated as simple interest.

 

Presumably,contractual interest would be calculated whatever way the contract said ... which will always be compound interest for bank accounts and credit card accounts.

 

Tim

[Mindzai]

Yes i think that's right, Im updating the spreadsheet now to work out s69 interest without compounding.

[too strong]

Having now worked out my interest I am now at the MONEYCLAIM stage.

I have replaced the 8% for the contract rate which is 27.5% is this correct?

 

 

The claimant claims interest under section 69 of the County Courts Act 1984 at the rate of 27.5% a year from 9/09/2000 to 4/9/2006 of £2821.07

[Mindzai]

NO! Section 69 only allows you to claim 8%. Thats not the principle you are claiming the contractual rate under. The moneyclaim site doesn't allow you enough space to justify why you are claiming contractual interest, and you also need to point out that in the alternative you require 8% interest under s69. for this reason you should probably use the N1 form. For wording, see the thread in my sig.

[tamadus]

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%.

 

36% is their annual APR I assume in which case the actual charging rate will be slightly lower due to the compounding element. This may explain better. Starting with a capital of £100 and a monthly rate of 2%

 

month Capital Rate Interest Total

1 100.0 2% 2.0 102.0

2 102.0 2% 2.04 104.04

3 104.04 2% 2.08 106.12

4 106.12 2% 2.12 108.24

5 108.24 2% 2.16 110.40

6 110.4 2% 2.21 112.61

7 112.61 2% 2.25 114.86

8 114.86 2% 2.30 117.16

9 117.16 2% 2.34 119.50

10 119.50 2% 2.39 121.89

11 121.89 2% 2.43 124.32

12 124.32 2% 2.49 126.81

 

So the annual APR is actually 26.81% not the 24% as a simple multipe of 12x2 suggests.

[too strong]

36% is their annual APR I assume in which case the actual charging rate will be slightly lower due to the compounding element. This may explain better. Starting with a capital of £100 and a monthly rate of 2%

 

month Capital Rate Interest Total

1 100.0 2% 2.0 102.0

2 102.0 2% 2.04 104.04

3 104.04 2% 2.08 106.12

4 106.12 2% 2.12 108.24

5 108.24 2% 2.16 110.40

6 110.4 2% 2.21 112.61

7 112.61 2% 2.25 114.86

8 114.86 2% 2.30 117.16

9 117.16 2% 2.34 119.50

10 119.50 2% 2.39 121.89

11 121.89 2% 2.43 124.32

12 124.32 2% 2.49 126.81

 

So the annual APR is actually 26.81% not the 24% as a simple multipe of 12x2 suggests.

 

Yep, I actually made a mistake and the correct figure is 2.6%.

 

The 36% apr is the actual cost of the 2.6% compounded over 12 months.

 

The joke is when I put the 36% into one of these online calculators it asked me if this was the correct figure, even the calculator couldn't believe it!

[pelham9]

Tamedus

 

I hope you will not take this amiss but in your last post you are using the term APR rather loosely (apart from saying annual annual percentage rate!) The %APR ( to be semanticlly correct) is a statutory term and it is not the actual annual rate that the banks charge which you so rightly calculate using a compound method. The legislation introduced the term %APR to allow people to compare the rates of different lenders and forced them to use a compound method for interest and then unaccountably allowed them to round the annual rate to one decimal place for the %APR. So when you calculate the actual annual rate to be 15.949999. the %APR will be 15.9% legally. %APR is therefore an approximation and should never be used to calculate daily or monthly rates - you will almost always get a lower answer than the banks charge if you do.

 

Does it matter. Well yes it does. The banks are delighted that the general population have equated the %APR with the rate they actually charge because it means they can get away with a [problem] that nets tham extra interest and allows them to advertise a rate that is lower than they in fact charge.

 

It goes like this. A bank considers 15.9 %APR to be competitive. They then do the compound calculation to get a monthly rate using 15.94999... as the start figure. If they round the result down (some use as many as 4 decimal places for the monthly rate) inevitably on reversing the calculation the actual annual rate will be nearly 15.9499 but can be advertised at 15.9%APR. This costs the average borrower on overdraft only a few pounds extra but nets the bank millions. I hate banks!!!

 

Incidentally I have looked at hundreds of %APRs and monthly rates and I have only found 2 that gave actual annual rate=%APR. So %APR hardly ever equals the annual rate!!

[Kidson]

In case of 'INTEREST' ~ have a look at these sites.

 

Annual percentage rate - Wikipedia, the free encyclopedia

 

Annual percentage rate - Wikipedia, the free encyclopedia

 

All explained

[pelham9]

Kidson

 

That is a good link though a bit sparse For those who wish to go into this matter in depth it would probably be better to Google for the Consumer Credit Act (1974) and its subsequent amendments particularly on advertising.

 

It does make the point that the %APR is an expression to describe the total cost of borrowing so that for example a start fee and a compulsary API will affect the %APR that lenders can quote. This makes it doubly dangerous to use the %APR to calculate interest rates without full knowledge of the costs included.

 

Rather than complicate matters I avoided this point as it is unusual these days for banks to charge overdraft set up or continuation fees. The only charge usually made for an overdraft is interest and the %APRs that banks use are usually correct. (Last year I caught Amex quoting a lower %APR than they should.) The point is that bank's actual annual rates are in almost every case higher than the %APR and this is deliberate policy becuase people will insist that the interest rate charged is the %APR which it very rarely is.

 

DO NOT USE the %APR in to calculate monthly or daily rates - you will nearly always get a wrong answer and sometimes a very wrong answer.

[too strong]

Kidson

 

That is a good link though a bit sparse For those who wish to go into this matter in depth it would probably be better to Google for the Consumer Credit Act (1974) and its subsequent amendments particularly on advertising.

 

It does make the point that the %APR is an expression to describe the total cost of borrowing so that for example a start fee and a compulsary API will affect the %APR that lenders can quote. This makes it doubly dangerous to use the %APR to calculate interest rates without full knowledge of the costs included.

 

Rather than complicate matters I avoided this point as it is unusual these days for banks to charge overdraft set up or continuation fees. The only charge usually made for an overdraft is interest and the %APRs that banks use are usually correct. (Last year I caught Amex quoting a lower %APR than they should.) The point is that bank's actual annual rates are in almost every case higher than the %APR and this is deliberate policy becuase people will insist that the interest rate charged is the %APR which it very rarely is.

 

DO NOT USE the %APR in to calculate monthly or daily rates - you will nearly always get a wrong answer and sometimes a very wrong answer.

 

 

On my previous post I talked about the percentage rate that I had on an old ASSOCIATES card.

 

They said they didn't have it on file so I calculated it using ! months statement which came to 3%.

 

So would I be right in saying that the interest rate is 3% per month whch is 36%, but the APR is 3% compounded which is somewhere in the mid to high 40's

[too strong]

Actually, when I use Mindzai's excel sheet and work it backwards to get 3% interest per month I have to put in 42.6% APR

[tamadus]

Tamedus

 

I hope you will not take this amiss but in your last post you are using the term APR rather loosely (apart from saying annual annual percentage rate!) The %APR ( to be semanticlly correct) is a statutory term and it is not the actual annual rate that the banks charge which you so rightly calculate using a compound method. The legislation introduced the term %APR to allow people to compare the rates of different lenders and forced them to use a compound method for interest and then unaccountably allowed them to round the annual rate to one decimal place for the %APR. So when you calculate the actual annual rate to be 15.949999. the %APR will be 15.9% legally. %APR is therefore an approximation and should never be used to calculate daily or monthly rates - you will almost always get a lower answer than the banks charge if you do.

 

Does it matter. Well yes it does. The banks are delighted that the general population have equated the %APR with the rate they actually charge because it means they can get away with a [problem] that nets tham extra interest and allows them to advertise a rate that is lower than they in fact charge.

 

It goes like this. A bank considers 15.9 %APR to be competitive. They then do the compound calculation to get a monthly rate using 15.94999... as the start figure. If they round the result down (some use as many as 4 decimal places for the monthly rate) inevitably on reversing the calculation the actual annual rate will be nearly 15.9499 but can be advertised at 15.9%APR. This costs the average borrower on overdraft only a few pounds extra but nets the bank millions. I hate banks!!!

 

Incidentally I have looked at hundreds of %APRs and monthly rates and I have only found 2 that gave actual annual rate=%APR. So %APR hardly ever equals the annual rate!!

 

I fully agree with you and yes they do use several decimal places to get extra pennies in which soon mount up. The best way to get rich is to take a little bit off a lot of people, but banks now are taking a lot off a lot of people. The Big Five in this country declared profits of about 36 BILLION pounds last year. Thats a LOT of compounding

 

My example was an attempt to simply explain how the 36% quoted rate doesnt work out at 3% per month. It really is a very simple example of how compound interest works and wasnt intended as anything more than that

 

Somebody else has also pointed out that the %APR should include things like set up fees etc which again disguises how much they really charge.

 

Nobody ever said bankers were honest lol I think we should extend the campaign to get official condemnation of the high interest rates they all charge. with base rate at 5% (example) there is no justification for any bank or credit card using underhand tricks and high interest rates. Compound rates were developed by bankers for the benefit of bankers.

 

I would be happy for my credit card to charge me say 2% above base rate but no way can I justify 30%

[tamadus]

Actually, when I use Mindzai's excel sheet and work it backwards to get 3% interest per month I have to put in 42.6% APR

 

You will get a higher year rate ( modified wording so as not to use APR) because of the effect of compounding the 3% which is what I tried to do in my earlier post.

[tamadus]

On my previous post I talked about the percentage rate that I had on an old ASSOCIATES card.

 

They said they didn't have it on file so I calculated it using ! months statement which came to 3%.

 

So would I be right in saying that the interest rate is 3% per month whch is 36%, but the APR is 3% compounded which is somewhere in the mid to high 40's

 

Very correct, the charge you 3% per month on the outstanding balance, over a year the compounding effect increases that to a yearly rate of over 40% but that is NOT the APR its just the rate they have charged you, as somebody else rightly pointed out the true APR calculation is a LOT more complex.

[tamadus]

Kidson

 

That is a good link though a bit sparse For those who wish to go into this matter in depth it would probably be better to Google for the Consumer Credit Act (1974) and its subsequent amendments particularly on advertising.

 

It does make the point that the %APR is an expression to describe the total cost of borrowing so that for example a start fee and a compulsary API will affect the %APR that lenders can quote. This makes it doubly dangerous to use the %APR to calculate interest rates without full knowledge of the costs included.

 

Rather than complicate matters I avoided this point as it is unusual these days for banks to charge overdraft set up or continuation fees. The only charge usually made for an overdraft is interest and the %APRs that banks use are usually correct. (Last year I caught Amex quoting a lower %APR than they should.) The point is that bank's actual annual rates are in almost every case higher than the %APR and this is deliberate policy becuase people will insist that the interest rate charged is the %APR which it very rarely is.

 

DO NOT USE the %APR in to calculate monthly or daily rates - you will nearly always get a wrong answer and sometimes a very wrong answer.

 

Your very correct the %APR is a very loose method of giving a comparison of various banks charges and it works GREATLY in their favour and for our purposes should NOT be used.

 

One point I will make though is the Alliance & Leicester do charge a £10 set up fee then £5 for every month the overdraft facility is used. They also charge a £10 continuation fee annually. I believe but don't know for sure that some other banks are now starting to use this as a method for increasing their charges.

 

Personally I am calculating interest on credit cards using the monthly rate stated on their statements multiplied by 12 to give a yearly rate, although that still leaves us 5 days short( 6 in a leap year) as it means I am working on a 30 day month and not a 30.4166 day month but it's a close enough calculation for my purposes. It also means my calculation is never going to be higher than the card companies, so they have no defence in that the figure is too high.