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I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay bac

I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay back £110. 10% interest. But my understanding on a compound interest mortgage is the bank says something like 2% interest. and they take the £100 and x by 1.02 and just spam ='s on the calculator until the actual interest percentage is like 180%. You shouldn't have to spend an hour learning how the bank are gnna screw you.

gbear605 7y ago
The thing about loans is that they should also be cheaper if you pay them off sooner. I could believe that they should be simple interest instead of compound, but that’ll get to 200% in only a bit longer (50 periods of 2% interest instead of 35), and banks would want higher interest rates on simple interest anyway, making it equal out. Plus, there are many great loan calculators online to use too.
PeterStuer 7y ago
While I appreciate your concern, the problem with what you call 'actual' interest percentage is not what reflects the financial transaction. As stated above, money has a 'time value'. Getting $100 today has a different value to you than getting $100 somewhere in the future. So to know whether a deal is interesting, I do not just have to know how much I will be getting back in return for my investment, but when. Getting back $180 as a single lump sum payment in a year is different than getting 12 monthly payments of $15 each month for the next year, even though in both cases you will have payed me back $180 looking back. The interest rate the bank quotes, in your example 2%, is the percentage amount by which your outstanding IOU to them will be increased at the end of the month, before you make your monthly payment. Now this was an example of a simple fixed interest rate. In practice there are unlimited kinds of formulas that can have variable interest rates over time tied too other things, capped or uncapped, and even then that is just one of the things that goes into a payments plan. So unless you have nailed down all the other factors, comparing just interest percentage A with interest percentage B, typically in the final haggle, tells you little. This is why I advice always looking at the series of monthly payments that you will have to make over the duration of the loan repayment, and compare these with the series of monthly payments due under a competing proposal. Banks will screw you over in more ways than you can imagine, but quoting a compound interest rate as opposed to a total amount repaid at the end of contract (which btw is often much longer than the repayment period or even unlimited in time but that is another story) isn't where it is at.
- majortennis 7y ago
  The point that you don't pay the total back at the end resonated with me. I agree holding the money has time value
frobozz 7y ago
That's what the 'A' in APR means. It's pretty clear. If I take out a £100000 loan with an APR of 2% and pay it back in full at the end of the first year, then the total amount I pay back is £102000. Apart from any early repayment charges, the original total term is irrelevant. When taking out such a large sum, over such a duration for buying your home, the total amount to repay is not the important aspect. It's not like taking out a loan to buy a car or a holiday. You don't have the option of choosing between buying now with a loan, or saving up for a few more months or years to buy without one. Affordability of the regular repayments over the duration of the loan is the key thing. There is absolutely no way I would take out a loan of that size with fixed interest in the way you describe. It would be far too expensive, and give the bank too much power. I'm relying on the fact that I can make large overpayments in order to own my home outright halfway through the original term. That couldn't happen without an annual interest rate. In fact, the most logical thing to do in that situation is to stretch the loan out for as long as possible, so that inflation makes your repayments cheaper. For a rough example - Imagine you bought a house for £100K 5 years ago, the interest is such that over 20 years it will cost £150K total (e.g. 3.5% over 25 years). You have probably paid about 30K, taking about £15K off the capital. You sell the house for the same amount you bought it. With annual interest, you owe the bank £85K, you give them that, and use the spare 15K for your next home. With a fixed price, you still owe the bank £120K. You give them the £100K you got from selling the house, and you somehow have to find £20K to pay them the rest.
- majortennis 7y ago
  That last bit made sense to me. I still think it's expensive and the banks have too much power. But you make a good point

gbear605 7y ago

The thing about loans is that they should also be cheaper if you pay them off sooner. I could believe that they should be simple interest instead of compound, but that’ll get to 200% in only a bit longer (50 periods of 2% interest instead of 35), and banks would want higher interest rates on simple interest anyway, making it equal out. Plus, there are many great loan calculators online to use too.

PeterStuer 7y ago

While I appreciate your concern, the problem with what you call 'actual' interest percentage is not what reflects the financial transaction. As stated above, money has a 'time value'. Getting $100 today has a different value to you than getting $100 somewhere in the future. So to know whether a deal is interesting, I do not just have to know how much I will be getting back in return for my investment, but when. Getting back $180 as a single lump sum payment in a year is different than getting 12 monthly payments of $15 each month for the next year, even though in both cases you will have payed me back $180 looking back. The interest rate the bank quotes, in your example 2%, is the percentage amount by which your outstanding IOU to them will be increased at the end of the month, before you make your monthly payment. Now this was an example of a simple fixed interest rate. In practice there are unlimited kinds of formulas that can have variable interest rates over time tied too other things, capped or uncapped, and even then that is just one of the things that goes into a payments plan. So unless you have nailed down all the other factors, comparing just interest percentage A with interest percentage B, typically in the final haggle, tells you little. This is why I advice always looking at the series of monthly payments that you will have to make over the duration of the loan repayment, and compare these with the series of monthly payments due under a competing proposal. Banks will screw you over in more ways than you can imagine, but quoting a compound interest rate as opposed to a total amount repaid at the end of contract (which btw is often much longer than the repayment period or even unlimited in time but that is another story) isn't where it is at.

majortennis 7y ago
The point that you don't pay the total back at the end resonated with me. I agree holding the money has time value

frobozz 7y ago

That's what the 'A' in APR means. It's pretty clear. If I take out a £100000 loan with an APR of 2% and pay it back in full at the end of the first year, then the total amount I pay back is £102000. Apart from any early repayment charges, the original total term is irrelevant. When taking out such a large sum, over such a duration for buying your home, the total amount to repay is not the important aspect. It's not like taking out a loan to buy a car or a holiday. You don't have the option of choosing between buying now with a loan, or saving up for a few more months or years to buy without one. Affordability of the regular repayments over the duration of the loan is the key thing. There is absolutely no way I would take out a loan of that size with fixed interest in the way you describe. It would be far too expensive, and give the bank too much power. I'm relying on the fact that I can make large overpayments in order to own my home outright halfway through the original term. That couldn't happen without an annual interest rate. In fact, the most logical thing to do in that situation is to stretch the loan out for as long as possible, so that inflation makes your repayments cheaper. For a rough example - Imagine you bought a house for £100K 5 years ago, the interest is such that over 20 years it will cost £150K total (e.g. 3.5% over 25 years). You have probably paid about 30K, taking about £15K off the capital. You sell the house for the same amount you bought it. With annual interest, you owe the bank £85K, you give them that, and use the spare 15K for your next home. With a fixed price, you still owe the bank £120K. You give them the £100K you got from selling the house, and you somehow have to find £20K to pay them the rest.

majortennis 7y ago
That last bit made sense to me. I still think it's expensive and the banks have too much power. But you make a good point