OT Interest calculation

[Gretel]

Once in a while I have to do interest calculations for my client and feel unsure about the exact date.

F.e. Loan date is 8/1/14, due date 9/30/14 - is the interest calculated for 60 or 61 days?

[Nashville]

Hope it Doesn't Matter

Hopefully, the amount involved doesn't justify concern.

Financial institutions address this in terms of partial days but this is rarely relevant in real-world consumer banking. I would use 61 days because the bank usually programs their calculators to choose the maximum and credits any payments at the close of business rather than any time during the day when it may be received.

[Gretel]

Thanks, Nashville. I appreciate that you are always there to give a helping hand.

[Roland Slugg]

I would use 61 days because the bank usually programs their calculators to choose the maximum.

I have never seen a bank do that. For S-T business loans banks count actual days the loan was outstanding ... the day the loan is made is counted, and the day it is paid off is not. Thus, a loan that started on August 1st and was paid off on August 2nd would incur one day's interest.

September 30th is 60 days after August 1st, not 61 days, so a loan outstanding for that time should incur 60 days' interest, and I believe all banks would charge 60 days of interest. Many banks, however, do use a 360-day year when calculating the daily interest, resulting in a small overcharge (of about 1.4%) for each day ... i.e. 365/360. Some banks also have a "minimum" interest charge on a given loan, so if a loan is paid off very quickly, the minumum charge may exceed the interest actually accrued.

[Corduroy Frog]

I have never seen a bank do that.

Strange Roland, but I've never seen a bank NOT do that. I don't dispute the methodology you present, but it seems like the banks always find a way not to credit the payment until the following day. It may be left over from the "after 2:00 posting, next day" syndrome.

I have also seen banks use the 360/365 ratio to their advantage. Almost every calculation imaginable is in their favor.

Most recently is a customer who paid off his "cash advance" balance on his credit card. It was segregated from all other credit card charges and had been on the account for months earning 30%. And the credit card was applying all payments to other charges and leaving the cash advance unpaid.

Customer was furious because the thing appeared on the next statement. On the day he paid it off, it was merged with other vendor charges which were processed on the night of the payment. Nothing he could do.

I don't dispute the methodology outlined in your post, they will tilt the scales in their favor at every opportunity. I'm obviously not a big fan of banks, except a few small ones.