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Math Help - Determining a Payment Plan's Interest Rate

  1. #1
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    Determining a Payment Plan's Interest Rate

    I am considering making a purchase where I can either pay for a product in full or I can choose to take advantage of their payment plan.

    Here are the numbers:

    Actual purchase price - $20,590

    Payment Plan:

    $663/month
    36 month term
    Nitty Gritty Payment Terms:
    - First 2 months due upon signing.
    - Payments are billed 2 months at a time and are due upon receipt.
    - They refer to payments as monthly payments, but it doesn't sound like it - it sounds like bi-monthly payments.

    SO, I want to determine the interest rate I'd be paying with their payment plan. My caculations would suggest that the monthly rate with bi-monthly payments is 1.60% or 21.04% annually [Excel: =RATE(18,1326,-20590). If the payments were truly spread out over 36 months the monthly rate would be .82% or 10.31% annually. [Excel: =RATE(36,1326,-20590).

    First question - am I doing this right?
    Second question - If not, what is the correct way to determine the interest rate of this payment plan.

    I have access to a business credit line that is currently at 5.45% - so the goal here is to make the best financial decision.

    Would love to get some feedback here. Thanks!!
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  2. #2
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    Quote Originally Posted by mikesaxman View Post
    My caculations would suggest that the monthly rate with bi-monthly payments is 1.60% or 21.04% annually [Excel: =RATE(18,1326,-20590).

    I have access to a business credit line that is currently at 5.45% - so the goal here is to make the best financial decision.
    NO, not 21%; you're multiplying 1.60 by 12; should be by 6: ~9.6%; roughly 10.25% annual.

    How can you go wrong if you can get same thing at 5.45% ?
    You sure this 5.45% is "guaranteed"?
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  3. #3
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    Wilmer,

    My 5.45% rate is with a business credit line - it's prime+2.20%. So prime would have to increase almost 5% points to equal this rate. So it's looking like that's the way to go.

    So my only error was to use 12 when trying to resolve the monthly rate into an annual rate. It looks like it's safe to say that I pay less interest in the payment plan by paying bi-monthly rather than monthly, but I'm a little confused. Since I'm losing access to my money one month earlier than I would under a monthly payment plan - shouldn't I be paying more. Or am I confusing interest rate with cash flow or something else?

    Thanks for the help here!
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  4. #4
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    Quote Originally Posted by mikesaxman View Post
    .... Since I'm losing access to my money one month earlier than I would under a monthly payment plan - shouldn't I be paying more. Or am I confusing interest rate with cash flow or something else?
    Guessing is about all that can be done; this info you gave is quite sketchy:
    "$663/month
    36 month term
    Nitty Gritty Payment Terms:
    - First 2 months due upon signing.
    - Payments are billed 2 months at a time and are due upon receipt.
    - They refer to payments as monthly payments, but it doesn't sound like it - it sounds like bi-monthly payments."

    If you pay 2 months NOW, then you're really borrowing 20590-1326 = 19264, right?
    That more than offsets 1st payment being 663 in 1 month...

    Best thing to do is ask whoever is attempting to grant you this loan.
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