APR problem in Finance matters

MORTGAGES-BASICS:

Mortgage is a way of borrowing money in order to purchase a house,which is often used as security for the loan. Mortgage is usually taken out with a building society or banks or financial houses.

In order to understand how the simplest kind of mortgage works, you can see what happens in the case of mortgage of £40 000 barrowed at an interest rate of 10 percent. The repayments are usually made for 20 or 25 years, although this can be changed. Suppose you make monthly repayments of £395.

How many years will it take to repay the loan?

Complete the following:

YEAR ONE: Initial loan: £40 000

Interest : (Interest for the year is added at the beginning

of the year)

Total Debt:

Repayments 12@395: £4740

YEAR TWO: Loan outstanding:

Interest :

Total debt :

Repayments 12@395 :

Outstanding balance :

This continues until the loan is completely repaid.

It is possible to set up an algebraic calculation for the repetitive routine:

Year one: Final debt=40 000 x1.1-4740

Year two:Final debt=(40 000 x 1.1-4740) x1.1-4740

=40 000 x1.1²-4740 x 1.1- 4740

Year three:Final debt =40 000 x 1.1³-4740 x 1.1²-4740 x1.1-4740)x 1.1-4740

AFTER N YEARS ,THE OUTSTANDING DEBT:

=40 000 X 1.1^N- 4740 X 1.1^N-1- 4740 X1.1^N-2-……

-4740X 1.1² -4740 X1.1 -4740.

=40 000 X1.1^N-4740 ^I-1 ……………………………………………………©

Now notice that: ∑ (1.1)^i-1 = (total of geometric serie!)

ANNUAL PERCENT RATE (APR) and PROBLEMS AND DISPUTES ARISING FROM INTEREST RATE

Foundation Basics of barrowing and lending:

APR is the annual percentage rate which every lende should declare it by law in UK for consumers who can compare rates between banks or financial houses before buying.

The second important point to know before buying is the flat rate of interest which is offered by lenders.

If lender says that you pay£300 per month for 12 months for £3000 barrowing:

This is £300 x12 =£3600

So customer pays £600 in interest since the interest: 600/3000=20%

The stated rate of 20 percent is the flat rate but customer does not have the use of full £3000 for a full year. (Attention)

I like to explain the following example of key information to the people who deals generally on barrowing money from banks and financial houses:

You barrow 100 pounds with 1.40% per month interest, this means:

Your 100 pounds at the end of the month costs you; 100 plus interest of 100 pounds at 1.40%

Which is: 100 x 1.014?

After 2 months: money at the end of first month plus interest @1.4%

Which is: (100x 1.014) x1.014=100 x 1.014²

After 3 months :( 100 x1.014²⁾ x1.014=100 x 1.014^3...

…………………………………..

…………………………………

…………………………………..

After 12 months: 100 x 1.014¹²=100 x 1.18155=118.155 In real terms, this means interest rate is equivalent to %18.155 or approximately %18.2

This example proves one point that monthly interest rate from banks are generally misleading the consumers and in fact it does not work in favor of barrowers that is why in UK , it is necessary by law , Financial houses must declare their APR in advance. My recommendation is that barrowers should seek minimum APR per year rate when barrowing money then convert back monthly interest rate and find out how much interest are paid and how much monthly payment-back is offsetting the barrowing month by month.

Monthly interest against annual interest rate (APR) are calculated and put into table as follows;

APR Monthly Interest %
8	0.64
9	0.72
10	0.79
11	0.87
12	0.95
13	1.02
14	1.09
15	1.17
16	1.24
17	1.31
18	1.38
19	1.46
20	1.53
21	1.60
22	1.67
23	1.74
24	1.81
25%	1.88
26	1.94
27	2.01
28	2.07
29	2.14
30	2.21
31	2.28
32	2.34
33	2.40
34	2.46
35	2.53
36	2.60
37	2.65
38	2.72
39	2.78
40	2.84
41	2.90
42	2.96
43	3.03