Different ways of calculating interest?

Hi folks.

I have two personal loans, one with Bank of Ireland, and one with my local Credit Union. For argument sake, we'll say both loans are for €10,000 and have interest rates of 6%.


For my Credit Union loan...

I sign into my online CU account, and I see my loan balance. I also see my 'interest due' balance, and this balance increases each day. According to an online calculator my interest will increase by €1.64 per day.

If 10 days pass, and I make a payment of €50 off my loan, €16.40 will go to interest of that, and the remainder, €33.60, will go off the loan balance.

After 10 days, my loan balance is now €9,966.4‬0.



For my Bank of Ireland loan...

I log into Banking 365, and I see an account with the loan amount owed in it. at 6%, using the same calculator as above, my daily interest charge is €1.64 per day.

If 10 days pass, and I make a payment of €50 off my loan, €50 will go off the loan balance. Every quarter (three months) I'll get a fee for the interest owed.

After 10 days, my loan balance is now €9,950.00.

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As far as my knowledge on loans go, interest is calculated on the outstanding balance. So, let's say you plan to pay your loan off early, does the bank of Ireland way of doing things mean that you are going to pay less interest than the Credit Union way of doing things, as they allow you to pay down the balance immediately, rather than the CU, who deduct the interest on the amount you pay before applying it to the loan?

Sorry if I'm wording this ass-ways, just something that struck me earlier on today and made me think I'd be better off trying to move my CU loan to the BoI as they seem to be much fairer in how they do things, but Im not sure if I'm just misinterpreting things and it actually works out the same at the end of the day anyway?

Cheers folks

phormium

I doubt there is any difference, most banks calculate interest daily but not all apply the accrued amount daily to the account, some do it monthly, some quarterly. So if you went to pay off that boi loan today when the balance says 9,950 I am sure there would be accrued interest since date interest was last applied to give a redemption figure. Yes in theory you could just lodge 9,950 but that probably wouldn't close the account, it would remain with a zero balance until next interest posting. If you ask for a figure to close it the accrued interest to date would be added on.

I understand what you're saying Phormium, but if you're charging interest quarterly, for argument sake, you're surely still doing it on the remaining balance of the loan? So if I have a month with 28 days in it, and I have a 10k loan, that I pay 5k off after 14 days, then the BOI will charge me interest on 10k for 14 days and 5k for 14 days, as my balance would reduce.


Whereas the credit union would deduct the interest first, meaning, in theory I'd get charged interest on 10k for 14 days, and 7k for 14 days (makey-uppy numbers).

Meaning ultimately the BOI loan will be cheaper?

phormium

No, you've lost me there

homer911

Difference between a Bank Loan and a Credit Union Loan

https://www.youtube.com/watch?v=5Fte-0_55q4

colm_mcm

Just look at the total cost of credit.

coylemj

Deleted User wrote: »

For my Credit Union loan...

I sign into my online CU account, and I see my loan balance. I also see my 'interest due' balance, and this balance increases each day. According to an online calculator my interest will increase by €1.64 per day.

If 10 days pass, and I make a payment of €50 off my loan, €16.40 will go to interest of that, and the remainder, €33.60, will go off the loan balance.

After 10 days, my loan balance is now €9,966.4‬0.

Interest is applied daily on the outstanding balance. Which is a combination of capital owed and accrued interest. Which you may or may not be able to see when you check your online account.

In the case of a variable loan with interest calculated daily, the outstanding balance will be reduced by the amount of the payment, whether it's the regular monthly payment or a voluntary one-off payment. It doesn't serve any practical (or mathematical) purpose to imagine how the payment is split.

Deleted User wrote: »

For my Bank of Ireland loan...

I log into Banking 365, and I see an account with the loan amount owed in it. at 6%, using the same calculator as above, my daily interest charge is €1.64 per day.

If 10 days pass, and I make a payment of €50 off my loan, €50 will go off the loan balance. Every quarter (three months) I'll get a fee for the interest owed.

After 10 days, my loan balance is now €9,950.00.

That might be the balance they show you on the screen but it's not the total amount outstanding. You're assuming that they don't accrue daily interest on the balance, just because they don't show it to you when you access their online service.

They add interest each night but it's accrued in a parallel account which you cannot see. Unless you walk into a branch and ask to clear the loan in full. It's compound interest so they don't just calculate it after three months, based on the balance on the last day of the quarter.

If the true (APR) rates being charged are the same, the actual balance after 10 days in the BoI account will be the same as the CU.

coylemj

coylemj wrote: »

You're assuming that they don't accrue daily interest on the balance, just because they don't show it to you when you access their online service.

No, I acknowledge that they are indeed charging me daily interest on the balance, however, for the BOI loan, the balance is lower than the CU loan, despite the same amount being paid to each loan.

To simplify things a bit and use easy rounded numbers (the number don't make sense, but just to get my viewpoint across):


Credit Union
I have a 10k loan. After 1 month I make a 5k payment. Of this payment, 1k is deducted for interest, and the other 4k goes to the balance.

Loan balance is now 6k.


Bank of Ireland
I have a 10k loan. After 1 month I make a 5k payment. Of this payment, 5k goes to the balance.

Loan balance is now 5k.



Now, assume I don't make any more payments on either loan for 12 months, I come back to clear them both at the same time. Interest has been increasing over time, however, interest is charged based on the current balance of the loan*. So my CU account has been charging interest on a 6k loan, whereas my BOI account has only been accruing interest on a 5k loan.

Therefore, my cost of clearing the BOI loan will be lesser than the cost of clearing the CU loan.


Am I not right here?

(*i know about compound interest, but the initial interest is still based on the loan balance, so compound interest only complicates things at this point I reckon)

coylemj

[Deleted User] wrote: »

No, I acknowledge that they are indeed charging me daily interest on the balance, however, for the BOI loan, the balance is lower than the CU loan, despite the same amount being paid to each

It's not, the actual outstanding balance will be the same. What you owe the Bank of Ireland is the balance that you can see on the screen plus accrued interest which has not yet been (visibly) added to your balance.

The only time you can see the full outstanding balance on the BoI account is once per quarter, on the day after they apply the interest.

coylemj

coylemj wrote: »

It's not, the actual outstanding balance will be the same. What you owe the Bank of Ireland is the balance that you can see on the screen plus accrued interest which has not yet been (visibly) added to your balance.

Right, reading that gave me the bit of a 'eureka' moment I think i was in need of alright. I can see what you're saying now.

Although I'm paying down the balance, the interest itself remains outstanding, and interest is accruing on the interest aswell as the balance, so I've actually paid the same amount off both balances, but they just display it to me in different ways.

Took me a while to get my head around that for some reason. I am an adult, I swear.

homer911

homer911 wrote: »

Difference between a Bank Loan and a Credit Union Loan

https://www.youtube.com/watch?v=5Fte-0_55q4

For some reason I didn't see this post the first time around. Only seen it now. Very helpful, fair play man