RV Loan calculatorLouis Byrd2019-01-08T07:33:57+00:00
We know how difficult it is to not have enough cash when you need it. When we are going to request a loan from a bank or we use some of the simulators that we can find online, when calculating the loan they only offer us the data of the monthly payment that we will have to pay during the months or years of validity of the loan.
The problem is that within that quota the interests and part of the amortization of theloaned capital are included . That is, they give us the joint data and not separated. We want to help.
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Once approved, you are redirected to the lender’s website, which details the rates and terms of the loan, as determined by the lender. If you accept these terms, you will have the funds deposited directly in your account within 24 hours.
Just 2 simple steps:
1) Calculate the Loan Interest (You can use the calculator)
2) Fill out the form to request and get approved.
If we know what we pay interest each month we can get an idea of how much the loan costs us and we will have a more complete view of how it is structured . We can also know how much weight the interest has on the total loan.
In this post we will try to explain how interest on a loan is calculated.
First of all, it should be noted that there are various loan amortization systemsand in the vast majority the interest is calculated in the same way.
In addition, to not complicate the issue too much, we are going to assume that we will use a French amortization system , which is the most used, and in which the monthly fee we will pay will always be the same (not its components).
Convert the interest rate
At the time of requesting the loan, the usual thing is that they give us an annual nominal interest rate . This interest rate will not be the cash in our loan, and to know it or we will have to ask it or we will calculate it.
To convert the annual interest rate into cash for the period considered, we will have to use the following formula:
I n = ((1 + i) (1 / n) ) -1
Where “n” corresponds to the number of periods in which we have divided the year to make the payments, that is, if they are monthly “n” will be equal to 12, if the payments are quarterly “n” will be equal to 4 since throughout the year we have 4 quarters, and so for the rest of periods.
The effective interest rate obtained will be the one that we will have to apply in each period .
For example, if we have an interest rate of 10% per year and we want to change it to monthly:
I 12 = ((1 + 0.1) (1/12) ) -1
Each month the interest used to calculate our quota would be that.
Calculate the interests of each period
To calculate the interest we are paying in each period we have to know what is the capital alive at that time. Living capital is the part of the principal (what we have borrowed) that we still have to return.
For the first period is simple because we simply have to multiply the capital requested by the interest rate of that period , but to calculate the rest is not so easy at first glance.
The living capital of each period will be equal to the capital of the previous period less the amount of principal that you have amortized in that same period.
C k = C k-1 – A k
Where C k and A k are the living capital and the amortized capital of the current period and C k-1 is the living capital of the previous period.
Then we will have to know how much we have amortized in each period . If we know the quota we pay and the interests of the first period, then we can calculate everything else.
To see this let’s give an example. Imagine that you have gone to your usual financial institution and have applied for a loan of 100,000 euros at a nominal 5% and the duration is 30 years . Let’s assume that the payments are monthly . And in the entity they tell us that we will pay 530.06 euros per month .
As we said at the beginning, the monthly fee includes the interest generated each month and the principal part that we return in each installment.
The first thing we would have to do would be to convert the 5% interest to a monthly effective rate, as we pointed out before. Would:
I 12 = ((1 + 0.05) (1/12) ) – 1 = 0.004074124
That would be the interest rate applied in each period .
We also know that the interests of each period are calculated based on the living capital of the previous period. For the first period, the living capital is the amount that we have requested , in this case 100,000 euros. So, the interests of the first period would be:
I 1 = 0.004074124 * 100,000
Now it was here where the problem arose, that we do not know what we have amortized in the first period. Directly we can not know it, but a simple way to calculate it is the following.
We said that the monthly payment is the result of the amortization plus the interest , If we have the quota and the interests, we simply have to subtract to know the amortized capital in said period. Thus:
A 1 = α – I 1
Where A is the amortized capital in period 1 “α” is the fee and I 1 is the interest paid in period 1.
Now we would have all the data to continue calculating the interests of each period 1 to 1 . The next step would be to subtract the capital amortized in that period to the living capital of the previous period and we would repeat the calculations for each period.
Once we had everything calculated we could add the interests of all the periods and know how many interests we have paid in total.
Calculate interest with Excel
Calculating this in this way can help you understand how a loan works, but it is not the best way to calculate interest. For that nowadays we have much more powerful toolsthat simplify our work a lot. Example of this is the loan simulator that we have done in Excel .
For example, from Excel we can calculate the interests of a loan directly and simply. Next we will see how it would be.
The only thing that needs to be clarified is that in this case we have calculated the monthly fee ourselves instead of giving it to the financial institution. We could directly put the quota in number that our bank gave us in the column corresponding to the quota.
For those who want to calculate their own quota , Excel has the PAYMENT formula for it. The elements of the formula are the following:
PAYMENT (Rate; Nper; VA; VF; Type)
- Rate = Effective interest rate for the period
- Nper = Number of total payments (if they are 30 years and you pay monthly, you will have 360 periods)
- VA = Capital (we put a – before it appears positive)
- VF and Type in this case are not necessary.
To calculate interest we also have a formula, which will give us the interest generated in any period. This formula is PAGOINT :
PAGOINT (Rate; Period; Nper; VA; VF; Type)
The only thing that changes in the elements that we must introduce is that “Period” appears, here we will have to indicate for which quota number we want to calculate the interest.
For example, if we want to calculate the interests of the tenth installment we would have to put a 10 in the period element.
There is also an interesting formula called PAGO.INT.ENTRE . It’s formed by:
PAGO.INT.ENTRE (Rate; Nper; VA; Period_initial; Period_final; Type)
In this formula we can calculate the sum of interest accumulated between 2 periods. If we put the first and last period, we will calculate the total interest we have paid for our loan.
The rest of the elements of the loan can be calculated as we have seen in the image of the amortization table.