# [thechat] Hey Buddy, Can you Spare a Dime?

Luther, Ron Ron.Luther at hp.com
Thu Jul 16 14:45:15 CDT 2009

```Fred Jones noted:

>>I still don't follow. I would think it's actually .5% a month fixed which is 6% a
>>year. That times 5 years is the 30% that I am giving the bank.

Hi Fred,

Nope.  A 6% loan on that amount would be \$338.32 a month.  You need to look up the amortization schedule and P&I (principal and interest) financial equations to correctly compute compounding interest - if you want to be on the same page talking to the bank folks.  {Compounding is the key word here.}  Here is a link to a loan mortization calculator (you can find the equations themselves elsewhere):
http://www.amortization-calc.com/

Plug in \$17,500 -- 11.15% interest rate -- 5 years

The calculator will spit out a monthly payment of \$381.80.  [Not *exactly* your amount, which is why I said 'roughly' 11.15% interest.]  That's what an accountant would tell you the annual interest rate is for this loan and what you'll see if you read all the way through the small print in the legaleze the regulatory folks make the bank give you.

Putting all your alternatives in a common language {like interest rate} makes it easier to compare different strategies.  For this kind of stuff I find it easiest to use the accountants language and their definitions.  It's easier to make a costly error if you insist on your *own* analytic metrics.  It can be done, but it IS riskier.

I wrote my own loan amortization schedule program/spreadsheet back in the early 80's.  *My* version allows you to see the impact of making 'heavy' payments against principal - so you can see how much interest you cut off the backend of the loan if you throw an extra \$10 at the loan in month 4 - and how much quicker you pay the loan off .... I still use that spreadsheet to track installment loans like houses, cars, and boats.  The equations don't go out of style.

I'm sure you already know, (I think we talked about this a few years ago maybe?), but you have to watch those low interest 'cash advance' things on your credit card because those amounts slide underneath the revolving charges and get paid off last - which, if you normally float a balance, means they accrue interest for a longer period of time than a separate loan would -- which translates to a higher "effective" interest rate than they are advertising.  Just something to watch out for ... they ain't doing this stuff to be nice to folks!

Cheers,
RonL.

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