Math isn’t my strong suit, so if someone could please give me a breakdown in how to calculate interest it would be appreciated. I would like to be able to calculate it both ways.
For example, if something costs $500 cash & carry, or 12 easy payments of $50 ($100 finance charge, $600 total monies paid), that equals x interest.
Or the other way, if I finance $100000 at 4.5%, how do I compute how much that 4.5% translates to in total amount of money financed (I know it will depend on the term) and the monthly payment (also depending on the term).
Those are actually pretty non-trivial calculations. If I were teaching a class on interest rate theory, I’d probably take a couple weeks to build up to being able to do them. If the first problem is monthly payments, the effective annual interest rate is about 41%, which is pretty typical for those financing plans.
If you actually do want to learn more, you’re going to have to be comfortable with some basic math, and have access to a spreadsheet program of some kind. Excel will definitely do what you need, and I’m sure that OpenOffice can as well (but I haven’t checked). For now, watch the Khan Academy video on the time value of money. It’s not going to tell you how to do your calculations, but if you don’t know that stuff cold, you’re not going to be able to do these problems.
There are a lot of online payment calculators, and you can do it using Excel also.
Bankrate.com’s calculator, for the 10,000 loan at 4.5% for 2 years, 436.48 is your payment. Total over 2 years is 10,475.52, so you’re paying 475.52 in interest. Not much more than the flat 4.5 rate.
If you pay it back over one year instead, your total payments lead to interest of 245.48, which is less than 4.5% - but it’s less because you’re reducing the principal over the life of the loan.
I haven’t found a site that does the reverse (payment of x, over y months, = z interest rate) but the Excel formula would be something like this:
rate(number_of_periods, payment_in_negative_amount, current_value, future_value), for example RATE(6,-100,500,0). Though when I plugged that in, it gave me a rate of 5% which sounded awfully low. Such a payment, on such a small principal, would be close to 100% I think.
There are 12 payments of $50 on a $500 principal, which would give you RATE(12, -50, 500, 0). That gives you the per period interest rate, but the annual interest rate is a separate calculation. I have no idea where you got your parameters, but they’re pretty badly wrong.