Principally Interest…

We all deal with interest calculations almost everyday.  There’s the interest being paid on your savings accounts at the bank.  There’s the interest being paid on your mortgage and the home equity line of credit, if you have one.  If you don’t pay your credit cards off in full you’re paying interest on that debt.  You may be paying off an auto loan as well. Student loans, furniture loans… the list goes on.  Whenever you borrow money or buy something and pay for it over time you are paying interest on the amount owed.

While most people feel that they understand how interest works, it turns out that many do not.  Even those who have a basic understanding of interest would have a difficult time telling you what their remaining principal balance will be after a year of making payments on a debt.  Does anyone ever check to see if the interest on their home mortgage is being calculated and credited correctly?  Not very often.  Or, if they do, they clearly don’t understand it.  We commonly receive calls from clients asking why, if they make a payment in the same amount each month, last month the interest paid was X and this month it is Y. (For a detailed explanation of how monthly interest is calculated, see the previous post “Keeping Interest Simple”.)

While calculating simple interest accrual is, well, fairly simple to do, other interest calculations can be a lot more work.  Figuring out the amortization of a fixed rate loan is not complex, but it can be time consuming and tedious if one does not have a calculator or a spreadsheet with that function already programmed into it.  If you are dealing with variable rate loans, compounding interest, extra principal payments, interest only with periodic balloons or any of a number of other variations on the theme things can get rather complicated.

The people who work for the various financial institutions have tools at their disposal to do these calculations for them (although given the current state of the U.S. financial system, one has to wonder if they know how to use them correctly).  Most of us don’t need to use them everyday or even every week, but we’d like to be able to verify that we are paying the correct interest on our outstanding obligations without having to acquire a black belt in spreadsheets.  Or, we should be able to recalculate the amortization schedule on our home mortgage based on alternative payment scenarios.  Or, we should be able to figure out what effect will be if the credit card company bumps up its interest rate, both in terms of how much more will the monthly payment be and how much longer it will take to pay it off if we continue to dribble along making the minimum allowable payment each month.

There are a number of websites that have calculators available to use for a specific purpose.  A mortgage website might have a calculator for home mortgages, or an auto dealers site might have one for car loans.   Frequently you can only use them on their site and cannot store your information.  The site run by Vertex42 is different in a couple of ways.  They are not a financial organization, so they don’t limit you to a tool that only works for the products they offer, thereby steering you away from other financial products that might fit your situation better.  They offer a very wide variety of financial calculators that cover just about any type of borrowing you might encounter.  Many of these calculators are spreadsheet templates that you can download to your own computer to use anytime, and they are free for personal use.

For example, the site has six different mortgage calculators, an auto loan calculator, a calculator for a loan that involves a balloon payment, and a home equity loan calculator.  All downloadable, all free for personal use.

They’ve got a calculator for estimating your 401(k) balance and one for planning the family budget.  Downloadable and free.  I counted at least two dozen calculators just related to financial matters.  They make it quite easy for you to plug in the numbers and get results quickly.  Whether you are checking the accuracy of the loan company’s monthly statement, thinking about buying a new car or home, or planning the family budget, you’ve got the ready made tools to do so accurately.