PMT or the bank?

[jumbledore]

I am trying to calculate the monthly installment on a loan of 23000, interest rate of 0.49% monthly, for 12 months. Using PMT I get a value of 1,978.26 but the bank guy tells me it's 2029.37. So who's right?

 

[alansidman]

I would ask the banker to demonstrate his methodology. He may be using a different calculation and you need to understand it.

 

[jumbledore]

I just checked using the compound interest formula,

23000 * (1+(0.49*12/100)) which gives 24,352.4 and dividing this value by 12, I get 2029.37 which is similar to what the banker calculated. So is PMT giving me an incorrect value?

 

[Xerno]

I just checked using the compound interest formula,

23000 * (1+(0.49*12/100)) which gives 24,352.4 and dividing this value by 12, I get 2029.37 which is similar to what the banker calculated. So is PMT giving me an incorrect value?

I might have completly missundestood this, if so, Im sorry in advance.

Just want to double check with you as you wrote that it was 0,49% in the OP, but in your formula you got 0,49*12/100

As 0,49 = 49% in excel can it be that the formula is wrong?

I did a quick caluclation using:
Monthly payment = [ r + r / ( (1+r) ^ months -1) ] x principal loan amount
Where: r = decimal rate / 12.

Which would be with a 0,49% (0,0049) rate:
Monthly payment = [ (0.0049 / 12) + (0.0049 / 12) / ( (1+ (0.0049 / 12)) ^ 12 -1) ] x 23000

Result: 1912,37

Dont really know how the bank gets to 2029.37, as there is a variance of 117.
Check with you bank as alansidman suggested to see how they calculated everything.

Once again, Im sorry if I missunderstood everything deu to that English is not my first language.

// Xerno

 

[joeu2004]

I am trying to calculate the monthly installment on a loan of 23000, interest rate of 0.49% monthly, for 12 months. Using PMT I get a value of 1,978.26 but the bank guy tells me it's 2029.37.

I just checked using the compound interest formula, 23000 * (1+(0.49*12/100)) which gives 24,352.4 and dividing this value by 12, I get 2029.37 which is similar to what the banker calculated. So is PMT giving me an incorrect value?

No. Both are correct! It depends on how the lender structures the loan.

The PMT formula assumes a monthly amortization of the loan using "actuarial" methods. That is, the monthly payment is about $1978.26, with an increasing portion going toward principal and declining portion going toward interest for each payment.

Your "compound interest" formula assumes a single annual payment that disposes the entire loan plus simple annual interest. Then the annual payment is divided into 12 monthly installments.

The latter method is allowed for short-term loans (typically 1 year or less) in some countries.

FYI, the single-annual installment method is better for the lender. The total interest is 23000*0.49%*12 = 1352.40. In contrast, for the monthly amortization method, the total interest is 12*PMT(0.49%,12,-23000)-23000 = 739.11 or 739.12, depending on how the lender rounds.

 

[jumbledore]

No. Both are correct! It depends on how the lender structures the loan.

The PMT formula assumes a monthly amortization of the loan using "actuarial" methods. That is, the monthly payment is about $1978.26, with an increasing portion going toward principal and declining portion going toward interest for each payment.

Your "compound interest" formula assumes a single annual payment that disposes the entire loan plus simple annual interest. Then the annual payment is divided into 12 monthly installments.

The latter method is allowed for short-term loans (typically 1 year or less) in some countries.

FYI, the single-annual installment method is better for the lender. The total interest is 23000*0.49%*12 = 1352.40. In contrast, for the monthly amortization method, the total interest is 12*PMT(0.49%,12,-23000)-23000 = 739.11 or 739.12, depending on how the lender rounds.

Thanks. I think your reply answers my question. But if I had to calculate the loan installments using the banker's way, what formula could I have used?

 

[joeu2004]

But if I had to calculate the loan installments using the banker's way, what formula could I have used?

Not sure I understand the question. The "formula" (procedure) that you used is correct, namely:

=ROUND(23000 * (1 + 12*0.49%) / 12, 2)

 

[jumbledore]

Not sure I understand the question. The "formula" (procedure) that you used is correct, namely:

=ROUND(23000 * (1 + 12*0.49%) / 12, 2)

No that's fine. You answered my question. I was just wondering if there is an inbuilt formula to calculate the installments based on the banker's method. Thanks