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Cooperaf.ve C xtension Calculating Interest Charges on Loans James D. Libbin, Extension Farm Management Specialist Guide Z701 FRBMH 7520 Any time money is borrowed, interest will be charged. The method by which interest is computed is often confusing, as is the manner in which the interest rate is stated. The federal Truth in Lending Act of 1968 (and its successor, the Truth in Lending Simplification and Reform Act of 1980) "was enacted in order to assure a meaningful disclosure of credit terms and to protect the consumer against inaccurate and unfair credit billing and credit card practices. The act imposes detailed reporting requirements on lenders. However, agricultural transactions are fully excluded from its application."1 Despite exclusion from the act, most agricultural lenders follow its spirit and intent. A main provision of the Truth in Lending Act was that lenders must calculate and show borrowers total finance charges over the life of the loan, as well as the annual percentage rate (APR). The APR provides a common basis to compare interest charges among lenders and it includes both interest and noninterest charges associated with the loan. The APR may or may not be the same as the contractual rate (the rate actually stated on the loan contract). The difference between the two rates comes about because of the different methods of computing the total interest charge. METHODS OF COMPUTATION Lenders use three major methods to calculate interest charges: 1) the addon method, 2) the discount method and 3) the remaining balance method. The first two methods are not commonly used by 'Uchtmann, D. L., J. W. Looney, N. G. P. Krausz, and H. W. Hannah. Agricultural Law: Principles and Cases. (New York: McGraw Hill. Inc. 1981), p. 362. major agricultural lenders, but these methods are used by finance companies which may make some agricultural loans. AddOn Method Under the addon method, the lender calculates the total interest charge by multiplying the entire loan amount by the contractual interest rate, and then by the number of periods covered by the loan. The interest charge is added to the principal to determine the total amount to be repaid. The total interest charge is thus: I = A X ic X N Where — I = total interest charge over the life of the loan A = amount of loan ic = contractual interest rate per time period N = number of periods covered by the loan The periodic payment is: Bn = (A + I) 4 N Where — B = total payment n = period under consideration For an example of addon interest, assume a $3,000 loan to be repaid in two annual installments. The annual contractual interest rate is 6%. Then, the total interest charge is: I = $3,000 X .06 X 2 = $360 and the annual payments will be: B = ($3,000 + 360) + 2 = $1,680
Object Description
Title  Calculating interest charges on loans 
Series Designation  Guide Z701; FRBMH 7520 
Description  Guide containing information on various methods of calculating interest on loans. 
Subject  Interest rates; Loans; interest (finance) (NAL); loans (NAL); investment planning (NAL); 
Creator  Libbin, James D. 
Date Original  198409 
Digital Publisher  New Mexico State University Library; 
Rights  Copyright, NMSU Board of Regents. 
Collection  NMSU Cooperative Extension Service and Agricultural Experiment Station Publications 
Source  Monograph; [4] p.; J87.N6 X313.61, F19/3, no. Z701 
Type  Text 
Format  image/tiff 
Language  eng 
Page Description
Title  Page 1 
Series Designation  Guide Z701; FRBMH 7520 
Subject  Interest rates; Loans; interest (finance) (NAL); loans (NAL); investment planning (NAL); 
Creator  Libbin, James D. 
Date Original  198409 
Digital Publisher  New Mexico State University Library; 
Rights  Copyright, NMSU Board of Regents. 
Collection  NMSU Cooperative Extension Service and Agricultural Experiment Station Publications 
Digital Identifier  UAAPg00Z7010001 
Is Part Of  Calculating interest charges on loans 
Type  Text 
Format  image/tiff 
Language  eng 
OCR  Cooperaf.ve C xtension Calculating Interest Charges on Loans James D. Libbin, Extension Farm Management Specialist Guide Z701 FRBMH 7520 Any time money is borrowed, interest will be charged. The method by which interest is computed is often confusing, as is the manner in which the interest rate is stated. The federal Truth in Lending Act of 1968 (and its successor, the Truth in Lending Simplification and Reform Act of 1980) "was enacted in order to assure a meaningful disclosure of credit terms and to protect the consumer against inaccurate and unfair credit billing and credit card practices. The act imposes detailed reporting requirements on lenders. However, agricultural transactions are fully excluded from its application."1 Despite exclusion from the act, most agricultural lenders follow its spirit and intent. A main provision of the Truth in Lending Act was that lenders must calculate and show borrowers total finance charges over the life of the loan, as well as the annual percentage rate (APR). The APR provides a common basis to compare interest charges among lenders and it includes both interest and noninterest charges associated with the loan. The APR may or may not be the same as the contractual rate (the rate actually stated on the loan contract). The difference between the two rates comes about because of the different methods of computing the total interest charge. METHODS OF COMPUTATION Lenders use three major methods to calculate interest charges: 1) the addon method, 2) the discount method and 3) the remaining balance method. The first two methods are not commonly used by 'Uchtmann, D. L., J. W. Looney, N. G. P. Krausz, and H. W. Hannah. Agricultural Law: Principles and Cases. (New York: McGraw Hill. Inc. 1981), p. 362. major agricultural lenders, but these methods are used by finance companies which may make some agricultural loans. AddOn Method Under the addon method, the lender calculates the total interest charge by multiplying the entire loan amount by the contractual interest rate, and then by the number of periods covered by the loan. The interest charge is added to the principal to determine the total amount to be repaid. The total interest charge is thus: I = A X ic X N Where — I = total interest charge over the life of the loan A = amount of loan ic = contractual interest rate per time period N = number of periods covered by the loan The periodic payment is: Bn = (A + I) 4 N Where — B = total payment n = period under consideration For an example of addon interest, assume a $3,000 loan to be repaid in two annual installments. The annual contractual interest rate is 6%. Then, the total interest charge is: I = $3,000 X .06 X 2 = $360 and the annual payments will be: B = ($3,000 + 360) + 2 = $1,680 