9 Ways Banks Use Compounding Against You
Banks use compounding against you in sometimes subtle ways to get you to spend more in interest. This video looks at the most common ways. There are others, but these are the ones you need to constantly watch for.
All the formulae for the calculations in this series are below.
Monthly rate(MR) = APR/1200
Daily rate(DR) = APR/36500
Monthly interest cost using MR = (1+MR) x Unpaid balance
Monthly interest cost using DR = (1+DR) x Unpaid balance x Days in billing period
Minimum payment formulas for credit cards(most commonly used version, check your statement):
1% of unpaid balance + Monthly interest cost + fees(if any) + penalties(if any).
Minimum monthly payment for a fixed payment loan:
Monthly payment = [MR +((MR/((1+MR)^months)-1)) x principal balance + fees and penalties(if any)
Formula for future value(FV) of periodic payments based on present value(PV) where:
r is the daily, monthly, or annual interest rate
n is the number of years on the loan
k is the frequency of compounding
PMT is the periodic payment amount
PV is the present value(0 if just starting) of the asset or account
Payment deposited at end of period:
FV = PV(1+r/k)^(nk) + ((PMT(1+((r/k)^nk)−1) / (r/k)
Payment deposited at beginning of period:
FV=PV(1+rk)^nk + (PMT(1+(r/k)^nk)−1)/(r/k)*(1+r/k)
If r=0: FV=PV+PMT×nk
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