When you apply for a loan, thousands of doubts may arise, but one question you should always keep in mind is: how much will they charge me interest? The answer you usually get is always full of numbers and percentages that only confuse you more. At Good Finance we want to give you a guide to clarify any questions you have about our interest and the charges of our loans.
Why is it important to know how to calculate an interest rate for a loan?
In many cases the interest rate charged on a loan is not the same as described, this usually happens because: the period is shorter than the one being calculated in the rate, it is applied in different periods of the month or it is necessary to value it according to the value of money in the time; Given this, different formulas have been created that allow us to make changes in rates to adapt to the requirements of periods and terms.
How do I calculate the Good Finance interest rate?
At Good Finance we handle an interest rate of 25% EA, but if Good Finance loans are 30 days, why is the annual rate? How do I apply that interest to my loan? To solve these doubts we must first clarify that interest rates can be expressed in different ways, the important thing is to know how to convert them and express them properly.
To perform effective rate conversions to other periods of time we use the following equality:
(1 + IE1) (n1 / 12) = (1 + IE2) (n2 / 12)
IE1 = Effective interest we want to convert
n1 = the number of periods in a year of the IE that we want to convert.
IE2 = The effective interest at which we want to pass our rate.
n2 = The number of periods in a year of the IE that we want to obtain.
This equality allows us to compare the effective rate we have with another periodicity, so we can transform the interest rate from years to months, days, etc.
Making the transformation of the operation we have that the 25% EA that we handle in Good Finance is equal to a monthly Effective rate (MS) of 1.87%. To make this conversion between rates, it is only necessary to apply this variation of the formula to convert an EA into MS:
Monthly Cash (MS) = (1 + EA) (n / 12) – 1
n = number of periods that fit in 12 months, being EA, is 1, because 12 months is 1 year.
To be clearer, let’s look at an example: If you apply for a loan in Good Finance of $ 250,000, what interest will you pay after 30 days? For this we will first convert the interest and then calculate it.
MS = (1 + EA) (n / 12) -1
MS = (1 + 0.25) (1/12) -1
MS = (1.25) (0.08333) -1
MS = 1.01876 -1
MS = 0.01876 = 1.1876% MS
To calculate the value at 30 days we apply the future value formula (VF) which calculates the value of an interest at the end of a set time:
VF = (Vp * (1 + MS) n ) -VP
Vp = the value of the loan you requested
VF = (250000 * (1 + 1.1876) 1 ) -250000
With the EM interest rate of 1,187%, we calculate it over $ 250,000 at 30 days would give us a value of:
How is interest in Good Finance if I pay before 30 days?
If we want to calculate the interest rate to cancel in advance, we must first pass the Annual Cash to Daily Cash interest rate, so we convert the formula to daily values:
Daily Cash (ED) = (1 + EA) (n / 360) -1
Let’s use it in an example: If you have a $ 250,000 loan with Good Finance and want to pay 20 days, how much would your interest be?
ED = (1 + EA) (n / 360) -1
ED = (1 + 0.25) (1/360) -1
ED = (1.25) (0.000277) -1
ED = 1.00062 – 1
ED = 0.00062 = 0.062% ED
To calculate the value at 20 days we apply the future value formula (VF)
VF = (250000 * (1 + 0.062) 20 ) -250000
With the interest rate ED of 0.062%, which over $ 250,000 at 20 days would give us a value of:
In addition to interest, what other charges do I charge at Good Finance?
In addition to the interest rate, at Good Finance we handle charges associated with your credit.
Insurance: Insurance is a charge that covers you in case you cannot make the payment for disability or death.
The insurance value is 0.3827% of the value you request . In our example of $ 250,000 the value of the insurance would be equal to $ 621 pesos.
Administration: The administration is a fixed charge on all Good Finance loans, which ensures the correct handling of your data and the availability of your quota for a period of 30 days. For all loans an administration charge of $ 16,000 pesos is made.
Technology: The technology charge is a charge that is made for the use of our technology platform and gives you the possibility to: review your account, make new credits, check the status of your credits and more. This charge is equivalent to 960 pesos per day. For our loan to be paid in 20 days, the technology charge is equal to: $ 19,200 pesos.
VAT: Being an entity that issues an invoice, Good Finance must charge VAT for the products. The VAT we handle is linked to the Colombian legislation of 19% and is calculated on the costs of insurance, administration and technology. In our example of 250,000 pesos at 20 days, the VAT charge is $ 6870 pesos.
How much would you pay in total for credit in Good Finance?
Entering Good Finance, you will find our credit calculator, in which you can try different amounts and terms to take your credit. It will show you each of the values explained above, as well as the breakdown of each one.