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# Caluclating interest on a loan - help (can/will pay)!!

Monsoon
Font Of All KnowledgeFMAAT, AAT Licensed Accountant Posts:

**4,071**
Hi,

I have a client who has a business loan from a private individual, who has agreed an interest rate of, say 4% over base. They have told my client to calculate the interest themselves.

I know the formula is hideously complex and I have no practical knowledge of it. I am not confident in being able to explain how do do it or indeed of getting it right!

Also, surely my client could choose to pay based on either a daily rate, or balance outstanding at the end of every month/quarter/year? The loaner has said it's up to her to caluclate it. Loan is repayable quarterly.

Is it simply a case of, say:

Loan taken out January

2nd payment in March, balance outstanding £19000

Interest = 19000 * (4.5% x 1/4)

Plus the capital repayment of, say, £500

i.e. charging a quarter of a year's interest on that quarter's payment

Payment in June

Bal outstanding (19000-500)

Interest = 18500 * (4.5% x 1/4)

Plus capital repayment of 500

etc

??

Client happy to pay someone to work it out and provde a spreadsheet to work it out going forwards, including the possibility of changing interest rates etc.....

Thank you!

I have a client who has a business loan from a private individual, who has agreed an interest rate of, say 4% over base. They have told my client to calculate the interest themselves.

I know the formula is hideously complex and I have no practical knowledge of it. I am not confident in being able to explain how do do it or indeed of getting it right!

Also, surely my client could choose to pay based on either a daily rate, or balance outstanding at the end of every month/quarter/year? The loaner has said it's up to her to caluclate it. Loan is repayable quarterly.

Is it simply a case of, say:

Loan taken out January

2nd payment in March, balance outstanding £19000

Interest = 19000 * (4.5% x 1/4)

Plus the capital repayment of, say, £500

i.e. charging a quarter of a year's interest on that quarter's payment

Payment in June

Bal outstanding (19000-500)

Interest = 18500 * (4.5% x 1/4)

Plus capital repayment of 500

etc

??

Client happy to pay someone to work it out and provde a spreadsheet to work it out going forwards, including the possibility of changing interest rates etc.....

Thank you!

0

## Comments

4,0711,954You need a spreadsheet with 3 columns; loan - interest - total

Then you can work out the interest daily, monthly or quarterly, but keep it in a seperate column so its not compounded.

4,071What is the practical difference between compounded and not? Obviously I see why savings interest that gets added to the account balance gets subject to compound interest (hooray!) but I'm not so clear on why loan interest would get compounded.

Is the logic that in future years they will owe interest that they haven't paid yet and so they are paying interest on that as well, i.e. compounded?

1,954Which would be 1.003675% monthly on total balance.

I think we need someone with more loan experience, any bankers?!

585Why don't you use PMT formula in the spreadsheet.

Given the loan amount, £19000

interest rate, (0.5+4) =4.5%

Length of Loan = 20 ( 5years times 4 qts)

gives a qtly payment of £1066.19

Formula = PMT((4.5/4),20,£19000)

Note 4.5% is divided by 4 for a quarter (12 for monthly payments)

20 = length of loan

The interesting thing of the above formula is you can change any variable to suit your needs

If you want the spread sheet just PM me your e-mail

hope this helps

460great for showing a complete breakdown of the capital element and interest element of a loan

1,954Thats a handy spreadsheet! The blood pressure tracker is a bit of an odd one...

Going back to Monsoons original question, with it being a add hoc type loan? How do you treat the interest?

1,954I've been playing round with spreadsheets and loan amounts. This template/compound interest does give the more meaningfull figures!

4,071My brain just doesn't get this stuff, especially how to calculate the initial payment (but my client has used various loan calculators online and they all come out with the same answer, so I guess that's right). I really, really don't want to advise her on this stuff as it's way outside what I'm comfortable doing. I like to think I'm pretty intelligent and good at what I do, but I feel like an utter thicko with this!

Where are the templates in excel? I didn't know they had any...

PGM, PM incoming...!

460but i think on 2007 its when you go to new file you select templates, if its not there you can download from the excel online templates

link for you http://office.microsoft.com/en-us/templates/loan-amortization-schedule-TC001019777.aspx?CTT=5&origin=HA001034640

4,071Yes I'm on 2007.

Look at that! Isn't that clever!! OOOhhhh!!!

And the loan amortization one works perfectly, thank you both!!

Not sure what you mean. It's a formal loan, but just from a private individual not a bank. I would just debit the interest to loan interest paid just as you would a bank loan.

1,954Ignore what I said, I was getting muddled up with the compound calculation.

1,0021,954That's what was throwing me, but no! The compounding should take this into account and get you to the same answer. Actually the more periods and he sooner you might take into any repayments sooner, and reduce interest payments.