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Financial Calculation!!

mikeyc71 14 1.2k
7 Oct 2008 9:37PM
Hey guys, does anyone know how to, or knows of any website, that has a calculation to convert a true rate of interest into a flat rate?

For example a flat rate of 14% converts to approx 24% true rate. How do I reverse the process?

Urgent help needed!

Thanks in advance!

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Carabosse 15 41.1k 270 England
7 Oct 2008 10:22PM
Assuming the interest is monthly paid, you would take the twelfth root of ((100 + the interest rate/100)-100) x 12 x100. Hope that's entirely clear! Grin

If you have a calculator which can do that, it should be straightforward.

What is the true rate and how often is interest added (e.g. monthly)?
stevemelvin 12 675 2 United Kingdom
7 Oct 2008 10:23PM
The flat rate is the interest paid in the first year divided by the amount borrowed.

It is normally about half the APR, give or take, depending on the term of the loan.

Have a look here for more info.

The main message is: ignore flat rates of interest as they are completely misleading. APRs are the "true rate of interest" as you call it and are the only meaningful way to assess the cost of a loan/credit.


User_Removed 13 4.9k England
7 Oct 2008 10:24PM
Like this ...........Damn toooooooo slow by a nanosecond Wink
stevemelvin 12 675 2 United Kingdom
7 Oct 2008 10:31PM

Quote:Assuming the interest is monthly paid, you would take the twelfth root of ((100 + the interest rate/100)-100) x 12 x100. Hope that's entirely clear!

At the risk of getting really nerdy here, the above is not the flat rate. The calculation above is something known in compound interest circles as the "convertible monthly annual rate", which is a valid figure depending on what you're asking, but it's not the flat rate.

Carabosse 15 41.1k 270 England
7 Oct 2008 10:40PM
That is really nerdy! Grin

I think it would help if Mike told us what he wants converted. We could then give it a go in our own peculiar ways! Wink
stevemelvin 12 675 2 United Kingdom
7 Oct 2008 10:52PM
Agreed, although my brain generally objects to trying to do compound interest this late at night! Smile
colin 13 697 5 Scotland
7 Oct 2008 11:50PM
True Rate of Interest:

An accurate method of calculating interest, that takes account of the compounding period and reflects the actual amounts and timing of repayments to reduce the capital borrowed within the transaction. The capital and the interest are added together and divided equally by the number of repayment periods in the agreement to give a repayment amount that contains an element of capital and interest.

These elements of finance balance and interest vary within each individual repayment. Within a fixed rate and fixed period agreement, the amount of interest will reduce with every payment, as the amount applied to the Finance increases with each repayment, although the repayment amount is the same.

The true rate of interest is ideal for use when the agreement has non-linear payment structures such as advance rentals with a pause or a final balloon payment on a Hire Purchase agreement. The Flat rate of interest cannot accurately cover these agreements.

The compounding effect of the true rate can be demonstrated using a bank account example. When the interest is added to the capital in the account, it is compounded to create increased capital. Then, at the next compounding period, the interest will be calculated using the increased capital figure in the account to increase the capital once again.

With true rates it is good practice not only to mention the rate, but also the compounding period. This gives a precise explanation of the way in which the rate is applied e.g. “10% per annum compounded monthly”, indicating the basis on which the rate is applied to the capital amounts outstanding. Also it might be useful to add, “with monthly repayments”, thereby giving a precise note of when the repayments will be applied. It is of course possible to have a situation whereby the rate can be compounded on a different period than the repayment interval.

This still doesn't answer your question, i.e.how to convert from True to Flat? It's somewhat easier to do via a proper financial calculator, ie. HP17bii than it is to explain. If you want to give us the details I can give it a go, although I hasten to add I'm no whiz on it.

this link may be of help.

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