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Bank Loans

Overview

For a general discussion on how repayments or APR are calculated click here

For a general purpose repayment calculator click here

Many "loans" from lenders may in fact be hire purchase or leasing transactions.  In hire purchase transactions, ownership of the goods remains with the lender until the end of the hire purchase period - the goods are then purchased for a nominal value.  In leasing, the ownership also remains with the lender.  The process of buying out the goods at the end of the period may be more complex.  The documentation may also be more complex, and so there may be a documentation charge.

How interest is applied

Interest on most bank mortgages is charged on a "per diem" basis.  Every time that a transaction arises, interest is calculated from the relevant date of the previous transaction to the relevant date of the current transaction.  The interest is accumulated up to the end of the "interest charging period" and then added to the outstanding balance of the loan. The interest amount is notified to the customer before charging, unless the interest amount is very small. Interest charging periods are typically quarterly. 

Interest in certain institutions is charged on the basis of annual rests.  In an annual rest calculation, interest is charged for the full year on the balance outstanding at the start of the year.  As repayments are made through the year, they are ignored in the interest calculation.  The repayments are accumulated until the end of the year and then applied to reduce the start balance for the next year.  In such a system, the repayments are precalculated to match this system, and are higher than in "per diem" systems.  In this type of system, when a rate change occurs in mid year, a calculation similar to a year-end calculation is performed to obtain a "true" balance outstanding, before recalculating the repayment for the remaining period of the mortgage.