Hi guys,
Are you planning to get the loan facility or leasing facility or got one recently...???
Any idea what the rate you are paying...???
I have seen some of the banks and many finance companies fooling their customers by artificially down-stating the rate they are charging. recently one of my friend got an offer for a facility at less than 10% interest rate, that friend was too delighted and précising the bank for offering such a low rate. But i got suspicious and worked out the rate based on the initial loan amount and the monthly instalments.
Believe it or not dudes, the actual rate they are charging on that facility is even more than 17%. I was able to advise her real fact and stopped her from getting fooled.
Similar incident happened to one of my office mate who took at leasing for a bike at 13%, but the actual rate charged is more than 22%.
Hope now you guys will be interested to see how these companies fools their innocent customers.
First of all let’s see what is the rate you are paying now or the rate you got offered using RATE function in Microsoft Excel.
Below shown is based on a loan of Rs.1mn for which an instalment of Rs.25,000 was made for 60months. The Rate function will give you the monthly interest rate charged if you fill the variable accordingly.
*please note you should put “-“ in front of C2 or C4 in the formula
Since the rate computed by the RATE function is on monthly basis, we have to multiply that by 12 to calculate the actual rate charged. In the above example the actual rate charged is 17.27%.
Ok, let see how these companies quotes artificially low rates to the same loan having same repayment.
For this purpose they use a term called flat rate, which will express the annual average interest paid as the percentage of the initial loan amount.
In the above example you will be paying Rs.1.5million (Rs.25,000 X 60) over next five years. What they will do is take the total interest paid (Rs. 1,500,000 – Rs. 1,000,000 = Rs.500,000 ) and will calculate the average interest paid per year. Since this is a 5 year loan (60months); the average interest paid per year will be Rs.100,000 . Therefore the rate they will be quoting 10% flat rate. (100,000/1,000,000*100).
You guys may feel like what they are doing is right, even my friend didn’t want to accept this fact and wanted to go ahead with borrowing. It took some time to convince her too. From the first instalment itself you start to repay a portion of the amount you borrowed along with the interest payment. Therefore you do not owe the full loan amount from the point where you make the first instalment. So after the 1st instalment what you owe to the bank is original loan amount less the loan amount repaid on 1st installment.
In the above example your 1st instalment will consist of interest charge of Rs.14,400 (1mn x 1.44%) and loan repayment of Rs.10,600. So just after 1st instalment the loan outstanding will be 1mn – 10,600. Therefore the interest charge for the next month should only on that amount not on total 1mn.
The flat rate of 10% means interest is being charged on total loan amount instead of how much you really owe to the bank.
A simple model is attached to calculate the flat rate and actual rate on the loan/lease facility is attached.
Sorry for being to technical, hope this would be useful to you all..
Are you planning to get the loan facility or leasing facility or got one recently...???
Any idea what the rate you are paying...???
I have seen some of the banks and many finance companies fooling their customers by artificially down-stating the rate they are charging. recently one of my friend got an offer for a facility at less than 10% interest rate, that friend was too delighted and précising the bank for offering such a low rate. But i got suspicious and worked out the rate based on the initial loan amount and the monthly instalments.
Believe it or not dudes, the actual rate they are charging on that facility is even more than 17%. I was able to advise her real fact and stopped her from getting fooled.
Similar incident happened to one of my office mate who took at leasing for a bike at 13%, but the actual rate charged is more than 22%.
Hope now you guys will be interested to see how these companies fools their innocent customers.
First of all let’s see what is the rate you are paying now or the rate you got offered using RATE function in Microsoft Excel.
Below shown is based on a loan of Rs.1mn for which an instalment of Rs.25,000 was made for 60months. The Rate function will give you the monthly interest rate charged if you fill the variable accordingly.
*please note you should put “-“ in front of C2 or C4 in the formula
Since the rate computed by the RATE function is on monthly basis, we have to multiply that by 12 to calculate the actual rate charged. In the above example the actual rate charged is 17.27%.
Ok, let see how these companies quotes artificially low rates to the same loan having same repayment.
For this purpose they use a term called flat rate, which will express the annual average interest paid as the percentage of the initial loan amount.
In the above example you will be paying Rs.1.5million (Rs.25,000 X 60) over next five years. What they will do is take the total interest paid (Rs. 1,500,000 – Rs. 1,000,000 = Rs.500,000 ) and will calculate the average interest paid per year. Since this is a 5 year loan (60months); the average interest paid per year will be Rs.100,000 . Therefore the rate they will be quoting 10% flat rate. (100,000/1,000,000*100).
You guys may feel like what they are doing is right, even my friend didn’t want to accept this fact and wanted to go ahead with borrowing. It took some time to convince her too. From the first instalment itself you start to repay a portion of the amount you borrowed along with the interest payment. Therefore you do not owe the full loan amount from the point where you make the first instalment. So after the 1st instalment what you owe to the bank is original loan amount less the loan amount repaid on 1st installment.
In the above example your 1st instalment will consist of interest charge of Rs.14,400 (1mn x 1.44%) and loan repayment of Rs.10,600. So just after 1st instalment the loan outstanding will be 1mn – 10,600. Therefore the interest charge for the next month should only on that amount not on total 1mn.
The flat rate of 10% means interest is being charged on total loan amount instead of how much you really owe to the bank.
A simple model is attached to calculate the flat rate and actual rate on the loan/lease facility is attached.
Sorry for being to technical, hope this would be useful to you all..
