Clueless about interest, somebody explain?

Stinicker · 15-10-2013 9:31pm #1

I never had to borrow money in my life but today I spoke to the bank as I was in for a chat about my savings deposit account. I was thinking about buying a house or else renovating an old house I own, I wouldn't have enough as it is but I certainly won't be taking a loan with the sort of robbery being charged by the banks currently.

Then the bank lad actually explained interest to me and I nearly had a stroke at his desk!

Say I borrowed €100k @ 4.5% over 10 years he explained I would have to pay back 4.5% of the outstanding capital which would reduce €10k per year.

Year 1: I would pay 4.5% interest or &#8364;4.500 and &#8364;10k off the &#8364;100k loan

Year 2: I would pay 4.5% interest or &#8364;4.050 off the outstanding &#8364;90,000

Year 3: I would pay 4.5% interest or &#8364;3,600 off the outstanding &#8364;80,000 

Year 4: I would pay 4.5% interest or &#8364;3,150 off the outstanding &#8364;70,000 

Year 5: I would pay 4.5% interest or &#8364;2,700 off the outstanding &#8364;60,000 

Year 6: I would pay 4.5% interest or &#8364;2,250 off the outstanding &#8364;50,000 

Year 7: I would pay 4.5% interest or &#8364;1,800 off the outstanding &#8364;40,000 

Year 8: I would pay 4.5% interest or &#8364;1,350 off the outstanding &#8364;30,000

Year 9: I would pay 4.5% interest or &#8364;900 off the outstanding &#8364;20,000 

Year 10: I would pay 4.5% interest or &#8364;450 off the outstanding &#8364;10,000

Sums of Interest repaid:

Year 1: €4.500
Year 2: €4.050
Year 3: €3,600
Year 4: €3,150
Year 5: €2,700
Year 6: €2,250
Year 7: €1,800
Year 8: €1,350
Year 9: €900
Year 10:€450

Grand Total: €24,750 just in Interest
Obviously there would also be the €100k to repay so for €100k I'd repay €124,750.

I thought if you borrowed say €100k @ 4.5% that I'd repay €4,500 plus the €100k, I never realized this is how it works and to be quite frank my entire understanding of the entire economic mess has just changed as I never knew the banks were screwing customers to this extent. Also what sort of absolute eejits would go borrowing hundreds of thousands only to have to repay nearly a quarter again.

My mind is blown on this revelation, before berating my ignorance on this I am an early school leaver and always save over 50% of my income but never knew this because I never had any reason to learn up on it; and I have always been frugal with saving for a rainy day a huge part of who I am.

galwayjohn89 · 15-10-2013 9:52pm

I am not really sure what your question is. But it works both ways. If you save €100,000 at 2% for 10 years at the end of the 10 years you would have €122,199.94 and not just €102,000

Banks need to make money they are not charities. If they only charged €4,500 for lending €100,000 over 10 years they would more than likely be loosing money due to inflation and the fact they would make far more money from investing the money.

Pablo Sanchez · 15-10-2013 9:55pm

Do you think that the bank can finance your 100k for 10 years for €4500? Would you lend a mate 100k of your cash for 10 years for €4500?

If you put your 100k on deposit for 10 years at 4.5% compound interest you would end up with €155k in your back pocket.

uberwolf · 15-10-2013 10:03pm

Stinicker wrote: »

I thought if you borrowed say €100k @ 4.5% that I'd repay €4,500 plus the €100k, I never realized this is how it works and to be quite frank my entire understanding of the entire economic mess has just changed as I never knew the banks were screwing customers to this extent.

You're using very strong language given the basic understanding that you have (it's ok to have a basic understanding btw).

Say the Bank lends you 100k for a year. You pay 4.5% or 4,500 for the pleasure. Where did the Bank get the 100k? It either got it from a depositor who is being paid 2.5% (2,500) or so. Or on the interbank market (rates vary), or a shareholder (who expects higher rates than a depositor because it's riskier to be a shareholder).

So after paying someone else for the money to give you the Bank has to pay its staff and infrastructure, make a profit and set money aside in case you don't pay back some or all of the money that you have borrowed. In this case that's 2,000 to spread around those different requirements.

And just like the interest that you're paying, these costs recur annually.

Cedrus · 15-10-2013 10:05pm

The rate you were quoted is 4.5% per Annum (each year) for 10 years, not 4.5% over 10 years.

It's how it always worked and it's not a bad rate at the moment, I've been offered 20% PA over 5 years in the past.

Cedrus · 15-10-2013 10:19pm

Stinicker wrote: »

.........................................................
I thought if you borrowed say €100k @ 4.5% that I'd repay €4,500 plus the €100k, I never realized this is how it works and to be quite frank my entire understanding of the entire economic mess has just changed as I never knew the banks were screwing customers to this extent. Also what sort of absolute eejits would go borrowing hundreds of thousands only to have to repay nearly a quarter again. ..................................................................

Stinicker wrote: »

.....................................................................The DIRT hike is a disgrace and will trigger another bank liquidity crisis as billions in deposits will now move offshore when they will be receiving practically no Interest here.

DOH!

dotsman · 15-10-2013 11:07pm

Stinicker wrote: »

the sort of robbery being charged by the banks currently.

Stinicker wrote: »

Also what sort of absolute eejits would go borrowing hundreds of thousands only to have to repay nearly a quarter again.

Actually, interest is a little more complicated than that as the bank will try to average it out over the life of the loan. Likewise, there are variances for when the interest is calculated and capitalised.

But, to be honest, with the attitude you show here in your post, you are right - you should never borrow money from a bank.

Stinicker wrote: »

my entire understanding of the entire economic mess has just changed as I never knew the banks were screwing customers to this extent.

From your post above, I firmly believe you still don't have an iota regarding the economic mess, but this is not the forum for it...

dnme · 15-10-2013 11:36pm

It doesn't work both ways anymore. We now have a disgusting despicable tax called DIRT. So for your deposit savings calculations, well after today's budget, you may aswell halve the results.

Clueless about interest, somebody explain?

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