Forum Discussion
Need some help understanding Rate function
Hi, I need some help to understand how Rate function works in this case :I want to calculate APR of one year of the loan. Let's say the loan is 1000000 for the period of 4 years and annual fees and ...
Fees and interest are based on percentage of principal. So i would say its fees and interest are the same. In this case it would be 100865,
Hm, i was assuming that I only need fees and interest as payment (pmt) and the function would divide principal into 4 periodic payments and would add it to interest and fees. Ok, thats error of mine.
If I say now that mine annual payment is : fees and interest 100865 + principal part 250000
my arguments
nper: 4
pmt: -350865
pv: 1000000
Rate would be = 15,08%
Hm, the APR formula that i have is
(Fees + Interest/Principal)/n*365*100
where:
Interest = total interest paid
Principal = Loan amount
n =is the number of days in loan term
So if put values in it :
((100865 * 4 ) / 1000000 / 1460 (four years in days) * 365 *100 = 10,0865 %
So now i dont get what percentage of rate function represents with 15,08%
Hm, i was assuming that I only need fees and interest as payment (pmt) and the function would divide principal into 4 periodic payments and would add it to interest and fees. Ok, thats error of mine.
If I say now that mine annual payment is : fees and interest 100865 + principal part 250000
my arguments
nper: 4
pmt: -350865
pv: 1000000
Rate would be = 15,08%
Hm, the APR formula that i have is
(Fees + Interest/Principal)/n*365*100
where:
Interest = total interest paid
Principal = Loan amount
n =is the number of days in loan term
So if put values in it :
((100865 * 4 ) / 1000000 / 1460 (four years in days) * 365 *100 = 10,0865 %
So now i dont get what percentage of rate function represents with 15,08%
GediminasC wrote: ``the APR formula that i have is (Fees + Interest/Principal)/n*365*100``
Loans can be structured in a lot of different ways, and "APR" can be calculated in a lot of different ways, both subject to local laws.
The methods that you described are not consistent with the methods that Excel financial functions, notably RATE, are based on.
(Excel financial functions use the so-called actuarial method. In contrast, are you following Islamic banking practices?)
So, if you continue to use different methods, you should abandon your use of the RATE function. GIGO! ("Garbage in, garbage out")
That said, I cannot tell if you truly understand your loan methods, or if you simply misunderstand them.
So, I really cannot help you further.
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I will comment on some inconsistencies in your mathematics, as you present them.
First, you seem to have a typo in your abstract definition of APR. In part, you are calculating:
(fees + interest) / principal
not
(fees + interest/principal)
I believe the first expression is correct, if 100865 is fees+interest.
Second, when you multiply by 100 at the end, the result is the decimal number 10.0865, not the percentage 10.0865% as you wrote.
(Note that I use period as the decimal point, whereas you use comma. That is not an issue.)
In fact, I deprecate the practice of multiplying by 100 at the end. I know that it is common practice in some presentation of "percentages". But it just confuses calculations, as you demonstrate.