# Interest rate

I had some confusion over the interest rate calculation of a bank loan. The bank offered \$6,800 cash loan and quoted the interest rate which is 7.08% per annum on a flat rate add-on basis. The tenor is 3 years and every month I will have to make the monthly instalment of \$229.01. Now if I put everything on the calculator, the interest rate will be different: N=36 PV=6,800 PMT=-229.01 -->CPT I/Y=1.08056 That means per annum will be 1.08056 x 12 = 12.97% which is different from what the bank quoted. I called the bank and got the explanation as below: Interest rate per annum= 7.08% Interest rate for 3 years= 7.08% x 3 = 21.24% Total pmt + principle at end of third year = 6,800 x (1+0.2124)=\$8,244.32 This amount divided by 36 months, every month I have to pay (8,244.32 : 36)=\$229.01 So what is correct about the interest rate? 7.08% or 12.97% per annum?

Your calculator’s bond math keys calculate YTM (IRR). The loan from your bank appears to be simple interest plus sinking fund, an entirely different calculation.

If they really told you that loan was 7.08%, they are in violation of all kinds of banking laws. They are suggesting that all of your principal is outstanding until the end of the loan, even though you have level payments down to 0 and thus the loan should be amortizing. If it were me, I would get it in writing and then I would shut them down. In fact, get it in writing scan it and send it to me and I will make them bend over.

Joey, which laws or section of any Act regulate such thing? Can you quote it? Does it apply to all countries in the world? I feel something wrong but I do not have any legal support. This is from Standard Chartered bank.

I forgot that some of you live in lawless countries like England. If you are in the US or at a bank operating in the US FDIC regs 226.22 and nearby deal with the requirements for calculating and informing borrowers of their interest rate. A bank could also be in violation of anti-fraud laws for such a huge miscalculation of interest rates.

Might be governed by TILA (truth in lending act) or Regulation Z, but I’m far from an expert in this field. Try google and/or wikipedia for a start. oops, I see now you’re not in US. Please ignore.

Yep those cover it even better.

> I forgot that some of you live in lawless countries like England. cheeky beggar. In the UK you have to quote the APR in text at least as large as any other rate. And in the UK it’s also a proper EAR not some nonsense rate like you poor ex-colonials have to use…

Still hanging on to those glory days, huh?