How are loans calculated?

SixPapaCharlie

SixPapaCharlie

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Starting to look into aircraft loans as I may finance a chunk of it.

So it isn't just: loan * interest / term
Meaning If I get a loan for 10k @ 5% for 10 years, is not 10,000 *1.05 / 120

There seems to be more to it than that and my google fu is weak today.

I tried several sites that offer great calculators but I would like to get the same numbers w/ pencil and paper versus a metal lending calculator.

Also
1. What are going rates and terms for aircraft loans (assuming A+ credit)?
2. Is getting an aircraft specific loan better than just grabbing an unsecured loan from a bank?

Thanks!
 
I looked into applying for a loan before I bought my airplane. I got as far as starting the application, the amount of information they were wanting was ridiculous..... largely because of the self-employed nature of my income/assets I just was going to have to dig out a ton of records for them and that was kind of where it stopped. I didn't really want to finance anyway and I could get enough airplane for what I wanted without doing it so I didn't bother.

Did I mention I have a perhaps unreasonable aversion and hatred of filling out forms? That may have factored into this...

Anyway from what I've been seeing on interest rates for other stuff the range seems to be around 2.5-3.5% on most low risk stuff.
 
SixPapaCharlie said:
I tried several sites that offer great calculators but I would like to get the same numbers w/ pencil and paper versus a metal lending calculator.
Click to expand...

The formula you are trying to use is correct if this is a "bullet", or non-amortizing, loan. So you need to determine how much amortization the lender demands. You almost need a mortgage calculator (HP-12c is one) that calculates the payment for you. Each payment pays that months interest plus a few bucks reducing the principal. As time goes on, the principal declines slowly at first but the principal payments increase each month (as the interest on the smaller principal decreases) so that the last payment is close to 100% principal and one month's interest on a very small principal. Then poof you are paid off. Of course this is for a fully amortized loan; frequently the loan has a bullet payoff after 5 or 10 years, whatever is the deal here.

-Skip
 
It's quite a bit more complicated than the formulas indicated earlier...remember "compound interest is the most powerful force in the universe" -Einstein (allegedly)

In any event remember that your interest is calculated probably daily and its 5% per annum compounded daily. So it's not 10000* .05 ...that's only 500 in interest over course of loan... Your 120 payment loan is a 10 year loan... It's probably closer to $4000 in interest (non scientific wag)
 
No, payment is not a simple multiplication of the Rate time the loan amount divide by the number of months. A few things are taking place, dealing with the way the loan is calculated and amortized. Amortization is the amount you want to search.

Payments are applied to both principal and interest on a formula in which interest is paid first and whatever is left is applied to principal. So, if you calculate the interest on the first payment, you are looking at 10,000 * 5%/12 = $41 in interest. The next month's payment is based on the 10,000 reduced by $41 plus the amount that was applied to the principal. Then there is compounding and whether the loan is calculated on a full year or a 360 day assumption. The "right" amortization calculation takes it in to account.

What you want to look for to do it "by hand" is the amortization calculation which is, at simplest

Amortization-Calculation.gif


where
A = payment Amount per period
P = initial Principal (loan amount)
r = interest rate per period
n = total number of payments or periods

That's assuming a simple interest calculation and no front-end loading of interest.
 
Meh....I have the excel spreadsheet....but an auto loan calculator with the terms and conditions is quick and easy.

5% and 15 yrs was the common deal when I was going thru this a couple of years ago.
 
Every month you owe interest the rate times the principal balance.

Now if you want to pay down the loan you need to pay some of the principal in addition to the interest due. Now next month you owe a little less interest because the principal went down. If you make equal payments, you pay more principal and each interest each month. The formula is the one Mark posted again.
 
Ok, that makes sense. Lightbulb is coming on.

Thanks
 
cowman said:
I looked into applying for a loan before I bought my airplane. I got as far as starting the application, the amount of information they were wanting was ridiculous..... largely because of the self-employed nature of my income/assets I just was going to have to dig out a ton of records for them and that was kind of where it stopped. I didn't really want to finance anyway and I could get enough airplane for what I wanted without doing it so I didn't bother.

Did I mention I have a perhaps unreasonable aversion and hatred of filling out forms? That may have factored into this...

Anyway from what I've been seeing on interest rates for other stuff the range seems to be around 2.5-3.5% on most low risk stuff.
Click to expand...
You must have a better credit rating than I do, and mine is almost perfect.
Prime is about 3.5 and a regular, low interest, unsecured loan in my neck of the woods is over 4%. A good home equity loan can be had for around 3.99%.

And I might mention, I have a very similar aversion and hatred to filling out forms. One of the reasons is that I think most of the forms I have to fill out are designed by idiots, or by devious geniuses.
 
Yeah, the issue of paperwork/forms:
- back in the day (pre-2008) when I was getting credit, if you could fog a mirror and sign your name, you got the loan.
- after the subprime debacle, the amount of information required is absolutely absurd.

Hopefully a middle ground is coming.

6PC find a plane to buy?
 
wrbix said:
Yeah, the issue of paperwork/forms:
- back in the day (pre-2008) when I was getting credit, if you could fog a mirror and sign your name, you got the loan.
- after the subprime debacle, the amount of information required is absolutely absurd.

Hopefully a middle ground is coming.

6PC find a plane to buy?
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No, just prepping. I have one thing that needs to get paid off before I pull the trigger. Looking like that should be 3rd quarter. I would really like to have it in time for Gaston's.
 
SixPapaCharlie said:
Ok, that makes sense. Lightbulb is coming on.

Thanks
Click to expand...

Checkout bankrate.com and their calculators.

Also, when you get further down the line and are ready to talk with an actual banker, I'll send you to the guy at Northstar Bank that the club has their aircraft loan with.

Some local banks don't understand or want aircraft loans. This guy does.
 
Wouldn't it be less expensive to purchase Hulk's white Corvette?
 
You can do it by hand (or using excel), or you can use this calculator and click "Show Amortization Schedule." It will show you for each monthly payment how much is going to principal and how much to interest.
 
What kind of bird are you looking at getting?
 
Pencil and paper will not be quicker/easier. If you have a smartphone, download a free loan calc app. Otherwise, Excel, or a financial calculator.
 
There is no easy way to do it by hand. Excel has what you need. So does a financial calculator. So far as understanding it, take a look at an amortization schedule. Each payment has two parts. One part goes to the interest and the other part goes to the principal. And the amount of interest and principal changes every month, the total monthly payment is the same every month.
 
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It's not real hard.

Multiply monthly interest by outstanding balance, that's what your interest is for that month.

You will pay this interest plus some principal.

Next month, subtract only the principal portion; what's left is your outstanding balance. Follow the steps above.

The hard part is determining the monthly payment. I don't remember that off the top of my head, but what the heck, I'm an engineer and my calculator does it for me. If you need more details, google is your friend, we're just normal folks who fly here.
 
SixPapaCharlie said:
Nah, I turn 40 this year and I'm planning my mid life crisis.
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You're starting way too late.

If you go by the cars I've owned, I've been having a mid-life crisis since 16, and it's still going on.

That either means I'll die tomorrow or live forever.
 
I'm always surprised nobody has a $5 business calculator anymore.

I mean, excel is fine, but if you have the calculator in your desk drawer at home and/or one on your phone and can learn how to use it, slapping together a quick "what if?" or "how much?" for darn near anything is easy.

d3602fd56830577cb2a7686e6ea8887c.jpg
 
Hank S said:
It's not real hard.

Multiply monthly interest by outstanding balance, that's what your interest is for that month.

You will pay this interest plus some principal.

Next month, subtract only the principal portion; what's left is your outstanding balance. Follow the steps above.

The hard part is determining the monthly payment. I don't remember that off the top of my head, but what the heck, I'm an engineer and my calculator does it for me. If you need more details, google is your friend, we're just normal folks who fly here.
Click to expand...
isn't that kind of the whole idea?
 
Excel-PMT done...

I was refi-ing the house recently and also determined you could figure out the ratio for payment to loan amount for a fixed interest rate and term. Could help you without having to open up the computer to figure out payments for different loan amounts with the same terms.
 
There are hundreds of free online calculators that will do any figuring for you in a moment's time, use them all the time. Google Mortgage Calculator...heck google has one when you do that, no further website required. Term, Principal, Rate; bdbing monthly payment.
 
SoonerAviator said:
Well, he could just be curious as to the value of the total interest paid in order to see what the true "cost" of using financing is.
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You are not going to get that without knowing what the monthly payment is. How do you know the interest for month #2 unless you know how much the loan principal was reduced in month #1? And then do the calculation 118 more times for that 10-year loan :eek:

(and don't forget the odd-day's interest :D)

Bryan's best bet is still to forget the pencil and paper and use one of the many loan calculators available online (or a spreadsheet) that will calculate and display the amortization. Which will generally include a column for the total interest paid. That will at least be close to reality.
 
I mean realistically, a banker is going to figure all this out, I was just curious about the math.
 
SixPapaCharlie said:
I mean realistically, a banker is going to figure all this out, I was just curious about the math.
Click to expand...

The easiest thing to understand is that your monthly interest is calculated as Principle remaining * annual interest rate/12. The payment is just the solution for the amount of additional principle required (plus interest calculated)on the first payment to pay off the loan in the term specified.
 
Let'sgoflying! said:
There are hundreds of free online calculators that will do any figuring for you in a moment's time, use them all the time. Google Mortgage Calculator...heck google has one when you do that, no further website required. Term, Principal, Rate; bdbing monthly payment.
Click to expand...


Heh. Type it into Google and you'll have mortgage and loan ads on your desktop for a month. :) Ask me how I know.

midlifeflyer said:
I think you've got a handle on that at this point, Bryan.



BTW, the banker also going to plug some numbers into a calculator designed for the job.
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I actually had a bank computer do the amortization wrong on a car loan once. I caught it and sent them a letter asking them to send me a printout of the amortization schedule so I could "find my error".

A couple of weeks later I got a notice that the payment had been calculated wrong, and I would have a credit the next month, and "Here's a copy of your amortization schedule sir. Thank you for your business." :)

Sometimes you really do have to watch them.

Another area I often caught mistakes was in tax escrow accounts. I decided to stop using lenders for escrow after that. There's no legal or otherwise requirement to do so, and they charge you enough money to "manage"
them that it's worth opening a separate savings account and funding it and paying the taxes yourself. Almost not worth it, time wise, but once you catch errors like that you realize you can either do a better job, or at least the errors wasting your time fixing them are your own.
 
I thought you owned the Cirrus? Are you moving to something else?
 
mirage00 said:
I thought you owned the Cirrus? Are you moving to something else?
Click to expand...

Dad owns the cirrus.
I enjoy flying it a great deal but I want something slower.
I'm more into putting around vs xc missions.
 
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