You see, the difference between monthly and daily compounding may not look big, but if your loan is couple of hundred thousand dollars then over time the amount can be significant. So, if they compound it daily, let’s have a look what the result is now:Įffective Interest Rate = (1 + 0.06/365)^365 – 1 = 6.1831% Well, the true is that most banks don’t compound the interest monthly. So in fact you are not paying 6% interest rate but 6.17%. If they do it every month then your effective interest rate per year will be like this:Įffective Interest rate = (1 + 0.06/12)^12 – 1 = 0.0617 = 6.1679% But this time it will also be the interest on top of interest from the previous month. The second month the bank will do the same. The first month the bank will calculate Interest as 0.5% of your outstanding Loan Balance and add it to your Loan Balance. If your yearly Interest rate is 6.00% then your monthly rate is 6/12 = 0.5% If you make monthly repayments and also your Interest is compounded monthly then the total interest paid per year will be slightly higher than 6%.īecause the banks like to make money and they do so even by not disclosing the whole story (or disclosing it only in the small print). Let’s say your Loan interest is 6% per year (p.a.). With mortgages the difference can be few thousands of dollars over many years. It’s not the same thing if they do it let’s say monthly or daily. Interest Compounding Frequency means how often your Bank calculates and ads Interest to your Loan Balance. Payment Frequency means how often you make your repayments.
Interest Compounding Frequency (daily, weekly, fortnightly and monthly)Īs you probably know, Payment Frequency and Interest Compounding frequency are not the same things.
Now we would like to tell you a bit more about what these enhancements will mean for you.
To download Demo version: click here or on the Excel icon. The above changes make this Excel Calculator even better and far more flexible!
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