Still celebrating National IT Professionals Day with 3 months of free Premium Membership. Use Code ITDAY17

x
?
Solved

APR Calculations

Posted on 2013-12-20
7
Medium Priority
?
353 Views
Last Modified: 2013-12-30
Hello

Following on from a question yesterday I am looking at an online finance calculator on behalf of a customer

http://www.financecalcs.co.uk/smartcalcs/LoanCalculatorquote.php

And they are insisting that the APR calculated by this calculator is correct. However it does not give an answer comparable to any other online calculators

For example on a loan of 10000 at 7% interest paid over 36 months this give an APR of 13.6%. Other online calculators give a value half this.

Do any of you math whizzes have any idea why this calculator gives such different values and what formula is uses. I obviously don't understand enough about APR to know why this vastly different value is correct and I don't want to look stupid to my customer :(

Thanks a lot
0
Comment
Question by:andieje
[X]
Welcome to Experts Exchange

Add your voice to the tech community where 5M+ people just like you are talking about what matters.

  • Help others & share knowledge
  • Earn cash & points
  • Learn & ask questions
  • 4
  • 3
7 Comments
 
LVL 37

Accepted Solution

by:
TommySzalapski earned 2000 total points
ID: 39732082
Aha!
They are using this formula here
http://en.wikipedia.org/wiki/Annual_percentage_rate#European_Union

If I plug in the numbers there except they use t1 = 0 for the left side and t1=1 for the right side

Left side of the equation is just total loan amount
10000 = SUM(k=1 to M) of (P_k*(1+APR/100)^(-T_k)
Where M is number of payments, P_k is payment number k, and T_k is the time that has passed since the loan started (in years).

If I plug in 11.457 for the ARP, the equation works out perfectly if I use T_1 = 1/12, T_2 = 2/13 etc.
It also works for any other combination I tried.
The Wikipedia article says T_1=0 though.
0
 
LVL 37

Expert Comment

by:TommySzalapski
ID: 39732127
Note that it agrees with the calucator here:

http://vindeep.com/Calculators/APRCalculator.aspx

The only thing is that the weird way they compute the interest makes it confusing. Note that the interest rate is not part of the calculation, just the payments and the term.
So to get the payment the same in the new calculator, use 10.895 as the rate and you will see the APR matches (11.46)

Note that they also try to tell you how to calculate the APR in Excel, although they don't really give the formula
http://vindeep.com/Personal/APRCalculation.aspx
0
 
LVL 37

Expert Comment

by:TommySzalapski
ID: 39732157
It should be clear now that APR means different things in different regions. If you live in the European Union, then they have laws about how APR is defined. The APR on the calculator in question and the EU APR in the calculator I just mentioned match and also are confirmed on my spreadsheet. The Wikipedia article saying T_1 = 0 must be using T_1 for the downpayment, so the first actual payment would be T_2 = 1/12 and thus everything agrees.

The other calculators that give different APRs are using the common U.S. definition of APR. The nice thing about the calculator I just posted is that it gives both.
0
Technology Partners: We Want Your Opinion!

We value your feedback.

Take our survey and automatically be enter to win anyone of the following:
Yeti Cooler, Amazon eGift Card, and Movie eGift Card!

 

Author Comment

by:andieje
ID: 39746292
Thanks a lot for your help
0
 

Author Comment

by:andieje
ID: 39746293
By the way, what did you use to 'plug in the numbers'
Did you knock the answer up in a programming language or did you use excel?
thanks a lot
0
 

Author Comment

by:andieje
ID: 39746306
Also, is this a typo in this comment: ID: 39732082
T_2 = 2/13 etc.
0
 

Author Closing Comment

by:andieje
ID: 39746316
Thanks a lot. In case you are interested I managed to get a reply of the software authors and they concurred with your deductions. Thanks for saving me some time!
0

Featured Post

Enroll in September's Course of the Month

This month’s featured course covers 16 hours of training in installation, management, and deployment of VMware vSphere virtualization environments. It's free for Premium Members, Team Accounts, and Qualified Experts!

Question has a verified solution.

If you are experiencing a similar issue, please ask a related question

Article by: Nicole
This is a research brief on the potential colonization of humans on Mars.
When we purchase storage, we typically are advertised storage of 500GB, 1TB, 2TB and so on. However, when you actually install it into your computer, your 500GB HDD will actually show up as 465GB. Why? It has to do with the way people and computers…
Finds all prime numbers in a range requested and places them in a public primes() array. I've demostrated a template size of 30 (2 * 3 * 5) but larger templates can be built such 210  (2 * 3 * 5 * 7) or 2310  (2 * 3 * 5 * 7 * 11). The larger templa…
I've attached the XLSM Excel spreadsheet I used in the video and also text files containing the macros used below. https://filedb.experts-exchange.com/incoming/2017/03_w12/1151775/Permutations.txt https://filedb.experts-exchange.com/incoming/201…

688 members asked questions and received personalized solutions in the past 7 days.

Join the community of 500,000 technology professionals and ask your questions.

Join & Ask a Question