If you are interested in manually calculating an interest amount with irregular payments, you need to understand the impact of a stub period in the calculation. Sometimes the calculations are easy to verify and sometimes you may get a hybrid calculation because you have to do two calculations to verify the interest amount.
When you have monthly compounding or a monthly rate period, i.e. a mortgage or auto loan, the interest calculation is based on the principal times the interest rate divided by 1/12th assuming the payments are all made timely month to month.
So, what is the calculation for interest if there is monthly compounding or a rate period and the payment is in 45 days? This is when you will have a hybrid calculation. To calculate the interest, you will count one full month and then do an exact day calculation for the remaining days. To determining the number of days, you always count backwards. So, if the payment is made on June 15 and the last payment was on May 1st, you would count one month from June 15th to May 15th and then count the number of days from May 15th to May 1st or 14 days. The exact day portion of the calculation would be the principal times the interest rate times the number of days and divided by probably 365. Another twist to this calculation is if you have compound interest. When you have a stub period, you would have to add the unpaid interest to the principal before doing the second part of the calculation. The calculation can be tricky but doable.
Another common situation is when you have monthly compounding and you have irregular payments and you may not have payments for multiple months. As in the example above, you not only have to calculate the interest month to month but you have to compound any unpaid interest every month and add it to the balance to do the next month’s calculation.
The algorithms in TValue software do all of these calculations for you. Simply put in the appropriate rates, dates, and amounts and TValue will do the proper interest calculations and amortize the loan appropriately. If you change a date or an amount, TValue will also re-amortize the loan or lease.
If you have any questions or need any help on how to do these calculations, feel free to call our Support Team at 800-426-4741.