6% interest = 50% interest?
I recently accompanied someone to buy a car. Initially, the idea of financing the €8,000 car was on the table. Santander Bank offered a loan at 6.5%. We then had the dealer calculate the total amount, and it would have been €12,000. How is that possible?
Okay, the loan was tied to additional insurance for vehicle damage (€500 in total, I think), but how did the final amount come about? It said something about an annual interest rate(?), but if I add 6.5% annually, I still get a significantly lower amount.
Can someone explain how this is calculated?
That's a totally crazy sum and it would be stupid to finance something like that.
PS: Term would have been 5 years.
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Da werden halt noch ein paar Nebenkosten und (Ausfall)Versicherungen dazukommen.
Exactly, it is an annual interest rate.
To simplify, you have to calculate it like this, because the running time is the only missing variable: 8000 * 1.065^n = 12000
n * ln(1.065) = ln(12/8)
n = ln(3/2)/ln(1.065)
n = 6.44 years
But that's just a simplification, because you don't pay interest on the EUR 8,000 every year; instead, the amount is reduced by the repayment. Therefore, you may even have to calculate it on a monthly basis.
The annual term will be higher. You'll have a low repayment, so the interest payments will be extended.
As I recall, this is something we practice when calculating pensions.
To start with, it is enough for you to know that it is realistic that you paid 12,000 euros in the end.
There are online calculators that allow you to track the installment payments, including the total amount.
By trying out different installments, I found out using Calculate Loan Term: Determine Loan Duration – Finanzfluss that the installment would need to be €72.38 to achieve a total loan amount of €12,000 after 14 years at an effective interest rate of 6.49%, for a loan of €8,000.
(Unfortunately, you cannot enter 12,000 directly as the target total expenditure.)
PS: A 5-year term? That only works if you have a remaining balance at the end. Otherwise, the math doesn't add up. With a remaining balance of €0, your total loan cost would be €9,347.
Die 6,5% sind p.a., also pro Jahr.
Sure, I said that myself. But 6.5% every year is still not €4,000 for you in the end.
Roughly speaking, 8k repaid over 5 years would cost around 1500€ in interest, at 6.5% interest
Just shot from the hip.
Perhaps you could give us the exact details of your financing.
Then you can say something about it.
I don't know the conditions.
Good morning.
Z = K x Z
Are you at an annual interest rate of 520 euros
Calculated over 5 years: 2,600.00 euros.
No, you pay it off, but you don't pay off the 8k at the end.
This is an annuity loan.
1500 approx.
Wo steht das?
Pro Jahr sind es 6,5 Zinsen. Ein Jahr 520,00 Euro.
OK, thanks 🙂
An annuity loan always has constant installments.
You don't pay off, for example, 200+ interest every month, so that your rate always decreases, but the rate remains the same over the entire term.
And since he is repaying the loan, the interest portion decreases over time.
Yours only fit with a maturity loan.
I borrow 8000 today and only pay back 8000+interest in 5 years.
That hardly exists.
Then I ask, what does this do in short?
Im ersten Jahr, ja.
It doesn't have to be there, you just know it when you deal with it.
Yes, the 6.5% is the annual interest rate, not the total interest rate.
But that’s what you actually learn in school.
The 500 euros are co-financed. Roughly speaking: 8,500 euros loan. Average debt 8,500 ÷ 2 = 4,250. Annual interest 4,250 * 6.5 percent * 5 years = 1,381.52 euros interest.
8500 plus 1381.52 = 9881.52.
So something must be wrong. The interest rate is about 15 percent.
Considering the running time, that seems like a lot to me.
I don't have an answer to your question, but I'd like to share a similar example. I once received a quote for a photovoltaic system. Along with the quote, they also offered financing. System cost: €38,000; total financing: €91,000.
Yes, but your term is longer than 5 years.
I'm aware of that. I just wanted to provide another example of the interest-repayment ratio.
Create yourself an Excel spreadsheet.
In the first month, you owe 8k. Interest is charged on this at 6.5%/360×30. That's 43.33. You subtract this from the installment, and you're left with the principal. Subtract the principal from the debt and you have the remaining balance, which you continue to calculate in the next month until the remaining balance falls to/below zero. If you calculate this with installments of 50, 100, and 200, you'll see where the rub lies. The lower the initial repayment, the longer the term, the higher the interest. This can add up to as much as 50% of the loan amount.
0.065 x 8000 is €520 times 5 years, which is €2600 plus the fees for the loan and your additional insurance, and probably even insurance for non-payment.
So yes, conceivable.
That seems like a lot to me, too. But I think there are other fees included. Do you know the term?
Financing with 6.5% interest is always stupid – especially for a car.
However, without all the relevant variables and conditions for the loan, the question cannot be answered.