Where I live there are a lot of credit cards that offer a loan of money and charge a handling fee, but then offer a 0% interest charge for the period of the loan. The loan is often 12 - 36 months in length, but unlike some loans, requires some payment each month. This amount varies but is usually around 2.5-5% of the outstanding balance. At the end of the load period the remaining balance would either have to be repaid in full or have a huge (typical credit card) interest rate placed on the balance -- typically around 29% per year.
Question -- how to work out the actual interest rate of one of these loans -- assuming that the whole balance is then paid off in the last month so no additional interest is paid?
Example:
Loan $7,000
Handling Fee: 3% (ie, $210)
Interest per month on loan: 0%
Pay back each month: 5% of balance
Loan Term: 24 month.
--So about $2,000 has to be paid back at month 24. But what is the effective interest of this loan?
Question -- how to work out the actual interest rate of one of these loans -- assuming that the whole balance is then paid off in the last month so no additional interest is paid?
Example:
Loan $7,000
Handling Fee: 3% (ie, $210)
Interest per month on loan: 0%
Pay back each month: 5% of balance
Loan Term: 24 month.
Month No. | Balance | interest this month | pay back this month | carry |
0 | 7,210.000 | 0.000 | 360.500 | 6,849.500 |
1 | 6,849.500 | 0.000 | 342.475 | 6,507.025 |
2 | 6,507.025 | 0.000 | 325.351 | 6,181.674 |
| ||||
22 | 2,332.677 | 0.000 | 116.634 | 2,216.043 |
23 | 2,216.043 | 0.000 | 110.802 | 2,105.241 |
24 | 2,105.241 | 0.000 | 105.262 | 1,999.979 |
--So about $2,000 has to be paid back at month 24. But what is the effective interest of this loan?