EMI/Interest on loan Reducing or flat?
Printed From: The Equity Desk
Category: Personal Finance & Lifestyle-Strategies & problems
Forum Name: Personal Finance - Startegies
Forum Discription: Discuss startegies for tax planning, insurance coverage, Retirement planning, Home loans car purchases or any thing that affects personal finance.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=2636
Printed Date: 25/Jun/2024 at 11:40am
Topic: EMI/Interest on loan Reducing or flat?
Posted By: praveen
Subject: EMI/Interest on loan Reducing or flat?
Date Posted: 18/Jan/2010 at 8:30pm
Your cost of funds is 17% in this case which is way too high for my comfort. I was looking for funds at almost half that rate. ------------- The quest for knowledge is a never ending Journey |
Replies:
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 4:36pm
This 17% rate is monthly reducing. See the effective rate. For Rs.100000 loan amount, Tenure of 48 months,@17% (monthly reducing) EMI=2886 Total Interest = Rs.38504 Total Principle+Interest = 138504 That means every year you pay Rs. 9626 as interest. So yearly flat rate comes around 9.63% and monthly flat rate comes around 0.8% If personal loan combined to Housing loan, then at 10.25%, flat rate comes around 6.76% for tenure 240 months. ------------- Pursuit of Value |
Posted By: praveen
Date Posted: 19/Jan/2010 at 5:01pm
Thats an incorrect way of calculating. Since your balance is reducing your principal is going down every month and your av. balance over 4 years is 50K and you pay interest of 38.5 K on that. Looks mighty expensive to me.
It would have been a good deal if you were loaned 1L for entire 4 years (you only pay the principal at the end of 4 years) and the total interest amount over 4 years was 38.5K ------------- The quest for knowledge is a never ending Journey |
Posted By: vaib
Date Posted: 19/Jan/2010 at 7:46pm
|
was that explained by some marketing guy ? Its not 9%, its 17% only as in mathematics. You just paying early. You can't think of saying 9% over entire 1 lac while u have already paid up part of it.
By doing monthly interest calculation they add interest in principle which means they can charge interest on interest on monthly basis. They don't give u monthly interest on savings. |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 8:21am
|
Monthly Reducing means, the principle you pay everymonth is reduced from the original amount, and next month interest is calculated on the remaining balance. where the question of interest on interest come here? Regarding calculation, it's simple maths i assume. Principle=Rs. 2083 (100000/48(months) without rounding) Interest=Rs. 800 (100000/0.8%) EMI= 2883 0.8% interest is payble every month. It's as simple as that. No marketting guy is required to understand. Why people think all the time that Loans & interest means cheating?  ------------- Pursuit of Value |
Posted By: praveen
Date Posted: 19/Jan/2010 at 9:26am
That is where the problem lies... After first month your principal amount is never 1L so why are you paying 0.8% interest on it..
Lets extend the logic. If someone loans you 1L now and ask for 95K next month and leave the remaining 5K for 47 months, would you still be willing to pay 0.8% permonth on the entire 1L?
I think we are digressing from the original topic here.. Would request basantji to make separate topic on this... ------------- The quest for knowledge is a never ending Journey |
Posted By: Chetan Panchal
Date Posted: 19/Jan/2010 at 10:54am
|
This is the trick most bank guys uses while calculating interest and generally people don't understand it.
The way you are calculating around 9% flat is not correct. You are not using 1L for four years so if u paid appr.76000/- after 3 year still you are paying 9626 pa for fourth year for balance 24000 which is more than 9% pa. |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 10:57am
No trick at all
I am not convincing anybody here. but it's appreciated to understand the calculation first, then criticize. now tell me where is in above calculation interest is being calculated on interest? Home loan is also calculated as Monthly rest, some banks like SBI calculate at daily rest. So do you mean they are even worst? ------------- Pursuit of Value |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 10:59am
check my table in the previous post..after 4 years, i am paying interest on the remaining capital only.. there principle amount is higher and interest is lower.. ------------- Pursuit of Value |
Posted By: praveen
Date Posted: 19/Jan/2010 at 11:06am
|
I absolutely agree with your table which is calculated on the basis of 17% p.a. and that is your actual cost of funds. ------------- The quest for knowledge is a never ending Journey |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:07am
|
There are many methods to calculate interest. 1) In Excel, give this formula =PMT(17%/12,48,100000) you will get your answer.. 2) As i shown in my early message, i have given complete amortization schedule. Banks can not use their own calculation method. they have to follow standard interest calculation practices & formulas. ------------- Pursuit of Value |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:12am
|
Now the Flat interest calculation If you simply calculate interest on 100000@17% you will pay every year Rs. 17000 so Rs. 68000 for 4 years. but actually you are paying 38504, why? because simultaneously you are paying back the principle also. I would be paying total interest over 4 years 38504, that means I have to pay Rs. 9626 per year. (38504/4) That means I have to pay 9.63% every year on Rs. 100000 amount that is called as flat calculation. This will give you idea if your borrowed funds generate more returns than 9.63% every year, at he end of the 4th year you will have surplus on the money you never owned. ------------- Pursuit of Value |
Posted By: praveen
Date Posted: 19/Jan/2010 at 11:18am
|
So do we agree that your cost of funds is 17% and not 9% (ie if you are buying stocks out of that money than your returns should be over and above 17% CAGR for you to make profits.) ------------- The quest for knowledge is a never ending Journey |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:20am
|
Now last argument.. If you could club this into your home loan. the formula =PMT(10.25%/12,240,100000) gives amount Rs.982 where 10.25%/12 = 0.85% 240 = 20 Yrs=Loan tenure 100000 = Loan Amount The benefit of this workout is that you get tax relief as well as some returns from the market. Hope we are on the same page now. Thanks  ------------- Pursuit of Value |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:27am
|
I assume that my cost of funds is the Interest i am paying i.e. 38504 Since this interest payment is spread over 4 years, i take it as my cost of funds for every year is Rs. 9626, which falls at 9.63% to the Loan amount of 100k Now if i make 0.9% every month, i.e. Rs. 900 on Rs. 100000 (forget about taxes & brokerage) following table shows I earn Rs. 4694 at the end of 4th year on the money (Borrowed capital) which i never own.
------------- Pursuit of Value |
Posted By: Chetan Panchal
Date Posted: 19/Jan/2010 at 11:27am
|
You Earn @ 14.42%
@9.63 you pay back 1st year 100,000.00 14.42% 14,420.00 34,596.00 2nd year 79,824.00 14.42% 11,510.62 34,596.00 3rd year 56,738.62 14.42% 8,181.71 34,596.00 4th year 30,324.33 14.42% 4,372.77 34,596.00 38,485.10 138,384.00 You Pay @9.63% 38,504.00 Net Loss (18.90) you have to earn more that 14.42% pa for break even. Even more as i have calculated payback amount on y-o-y basis and not monthly which will furthur increase you % of cost of borrowing.so you have to earn around 17% appr.to break even only. |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:31am
Net Loss? 
------------- Pursuit of Value |
Posted By: 9StockPortfolio
Date Posted: 19/Jan/2010 at 11:35am
|
Forget 14.42% Even if I earn @10% every year, I earn Rs. 1334.. Sir, where did you get that loss from? PS: Ok, I got how you calculate. you are paying back from the loan amount. While I am using/rotating full 100k amount for 4 yrs, while paying interest from my pocket.. ------------- Pursuit of Value |
Posted By: Chetan Panchal
Date Posted: 19/Jan/2010 at 11:51am
Its profit of 18 rs. typo error. Its difficult to understand ur maths. how u can rotate full 100K amt for 4 years when u have to pay back 2883 every month. have you calculated cost of borrowing on that amt.2883 per month? and if ur paying back from loan 100k plz explain how u can earn rs.900 per month till 48th month when ur cash on hand reducing every month. |
Posted By: 9StockPortfolio
Date Posted: 20/Jan/2010 at 12:15pm
|
I am not paying back from the loan itself. I have enough finances available to pay back the entire loan with it's interest. Why i am borrowing? to tap the opportunity that might turn out a good workout. Suppose if I invest all amount in Hyderabad Industries, and after 4 years, it turns out a multibagger then? till that time i would be paying 2886 from other sources like Salary. I won't touch that investment until i get desired returns. My Desired returns can be 0.9% per month or 25% per year. You have 4 years to use that 100k. You pay 34672 for first year, and in-turn you get 100k cash for investing. You may think like this also. get 2 bagger in one year and return back the loan in one year itself. Retain the profits. It's up to you to serve the entire loan tenure or not. ------------- Pursuit of Value |