Solved

Calculating APR - effect of an upfront fee

Posted on 2013-12-30
4
325 Views
Last Modified: 2014-01-06
Hello
I'm looking at this online apr calculator and I'm a bit confused as to why adding an upfront fee to a loan increases the apr so much

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

For example, if i add a fee of £250 to a 10k loan over at 5% interest over a year the apr changes from 9.5%, the apr changes to 14% give or take depending on whether the fee is upfront or spread. I dont understand why this is so much higher than if i simply borrowed 10250 (where the apr stays at 9.5%). I know that doing this approximation isn't quite the same as having an upfront fee because an upfront fee would affect the value of the first monthly payment whereas all the payments are the same in my quick workaround , but even so i wouldnt expect this. In fact i would expect an upfront fee which is paid off in the first month and hence accrues hardly any interest would have negligible affect on APR?

Thanks in advance for any light you can shed
0
Comment
Question by:andieje
  • 2
  • 2
4 Comments
 
LVL 25

Expert Comment

by:nickg5
ID: 39751487
In that calculator what number are you entering in the space for "flat rate of interest"
Are you entering 0
0
 

Author Comment

by:andieje
ID: 39752444
5%
0
 
LVL 25

Accepted Solution

by:
nickg5 earned 500 total points
ID: 39752506
Leave the $10,000 as $10,000. Then change the "upfront" to "spread" and you see that the 14.4% goes to 14.8%.

The actual interest is $500 or 5% of $10,000.
That same $500 is the "total charge for credit"

If you add the 250 as an arrangement fee then you see the "total charge for credit" is $749.96 which is accurate.

Now, change the $10,000 to $10,250 and leave the arrangement fee zero.
Now the "total charge for credit" is $512.56 which is also correct.

Why? Because you are "financing" the extra $250 at 5%. 5% x 250 = $12.50.

It's more simple to not use such calculators.
The 14.5 or the 14.8 or the 9.5 does not change the numbers.

If the 250 is part of the loan you pay 5% on that 250.
If 250 is not part of the loan but an arrangement fee then the entire 250 is added to the $500 interest and is excluded from the A.P.R. which is calculated on the loan amount of $10,000 at 5%. That is why you only see 9.5%

By adding the 250 as part of the total cost of credit you are increasing the "total" extra from $500 to $750.

So, since you are increasing the 5% or $500 by 50% by adding another $250 here is where
the 9.5% must also go up by 50%.

What is 50% of 9.5? It's 4.75
4.75 + 9.5 = 14.25 and basically completes the math on how the 9.5% gets to 14.4 or thereabouts.
0
 

Author Closing Comment

by:andieje
ID: 39760753
Brilliant explanation - thank you
0

Featured Post

Highfive Gives IT Their Time Back

Highfive is so simple that setting up every meeting room takes just minutes and every employee will be able to start or join a call from any room with ease. Never be called into a meeting just to get it started again. This is how video conferencing should work!

Join & Write a Comment

Suggested Solutions

Title # Comments Views Activity
derivative 19 23
homophone word for ***archeries*** 5 83
Group Data Frequency Distribution 9 39
Homework Help 5 52
Foreword (May 2015) This web page has appeared at Google.  It's definitely worth considering! https://www.google.com/about/careers/students/guide-to-technical-development.html How to Know You are Making a Difference at EE In August, 2013, one …
This article seeks to propel the full implementation of geothermal power plants in Mexico as a renewable energy source.
It is a freely distributed piece of software for such tasks as photo retouching, image composition and image authoring. It works on many operating systems, in many languages.
This demo shows you how to set up the containerized NetScaler CPX with NetScaler Management and Analytics System in a non-routable Mesos/Marathon environment for use with Micro-Services applications.

760 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

Need Help in Real-Time?

Connect with top rated Experts

23 Experts available now in Live!

Get 1:1 Help Now