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When you have been credited with financing in the form of a business loan, car loan, mortgage or even utility financing in the form of a credit card draft, it is essential to know how the calculations for the payments you will be making are arrived at. This is important as it allows you to verify that finance charged that you had been given was billed correctly. Many people ignore these calculations as the billing statements received always contain the finance charge.
If you are using a credit card, you can calculate the finance charge on your own as long as you have information regarding your loan balance amount, the annual percentage rate (APR) charged for it and the billing cycle duration that the loan is issued for. Consider the following example
Suppose you have an outstanding credit card amount of $1000 and you are billed to pay every month. Assuming that the APR charged by the financing institution is 15%, the monthly finance charge is calculated as follows;
Loan amount = $ 1000 APR = 15% Billing frequency/cycle duration = monthly. Considering that there are 12 months in a year, the monthly rate will be (0.15)/12= 0.0125 Hence, monthly finance charge = Loan amount x monthly rate = $1000 x 0.0125 = $12.5 If the credit card billing duration is less than 1 month then the following formula is applicable; Finance charge = Loan balance x APR x (days in the billing cycle)/(365 days of the yearr) Assuming the billing cycle is 25 days; Finance charge = $1000 x 0.15 x 25/365 = $10.3
It is important to note that shorter billing durations have less finance charges. It is also to note that the finance charge is only the interest charged by your creditor; the total amount payable will include the billing duration principle amount.
Car loans, mortgages and other property loans are also calculated in the same way. Let us take the example of a car loan. The following are the steps to take to calculate the finance charge on your vehicle loan.
Determine the principle amount
The first step is to clarify the amount that you are being financed for. This is called the principal amount. For you to be allowed the loan you need to pay an initial deposit amount which is a percentage of the value or price of the vehicle. The amount that remains (actual vehicle value – initial payment amount) is what is known as the principal amount.
Establish the annual percentage rate and duration of your loan
The APR rate will determine the extra amount over the principal amount you will have to pay each year or each month as monthly finance charges on your loan. Low APRs generally issue more extended payment duration periods which means that you may end up making ore payments making them more expensive in the long run as opposed to higher APR loans with shorter durations.
Determine how many payments you will be making each year
Most car loans are serviced monthly, and you will need to know how many payments you will be making every year and how many payments you will make in total to the end of your loan to enable you to calculate the finance charge of your loan.
When you have the essential variables discussed above you can choose to find an online car loan calculator and input the figures, and it will provide you with the financing charge figures.
If you wish to calculate your finance charge manually you can follow the procedure below;
Make sure you convert your APR from percentile form to decimals by dividing by 100. Multiply your percentage rate by your principal amount as discussed above. Use the formula below to establish your monthly payment.
Monthly payment = (Interest rate on each payment x principle/((1-(1+interest rate on each payment)^(-(number of payments)) ) Example; If a car is worth $30,000 and a client makes an initial payment of $10,000, and the APR issued by the financing company is stated at 8.4%. The loan duration given is 5 years. What will the monthly payments be? Solution; APR/100= (8.4)/100= 0.084 (0.084)/12=0.007 The interest rate to each payment x principle = 0.007 X (30000-10000) = 0.007 X 20000 = 140 = $140/((1-(1+0.007)^(-(60 months)) ) = $140/((1-0.658) Monthly payment = $409.36
This is the total amount of money that you will be giving to your creditors as your loan repayment amount. If you would like to know the monthly finance charge divide your principal amount by the number of months of the duration of your loan and subtract the result from the monthly payments you are remitting.
Principle/Duration = $20000/60=$ 333.33 Monthly finance charge will therefore be $409.36 - $333.33 = $ 76.03
For more help on finance charge calculations, feel free to visit finance assignment solutions.