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bigfudge2017

LOC question

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Hello all, 

figured I would ask this here because I’m financially illiterate and because there’s no one I know that would know. 

My LOC agreement states that interest on my principal will be calculated daily and compounded monthly. The rate is at prime (3.95). 

Assuming my first year tuition will be ~13k, and I let that balance sit on the LOC for a year...does that mean that each month they’re gonna calculate ~4% interest on 13k, and add it onto my total amount borrowed? The way I worked it out, that means after 12 months I’d owe a total of 19k. That’s about 500 in interest per month.... I may have that wrong and I really just want to understand what I’m getting into with this LOC before I start drawing on it like a kid with no impulse control and no parental supervision.

 

thank you!

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It's only 3.95% per year.

Compounded monthly means they get to charge you interest on interest which means you effectively pay slightly more than 3.95% on an annual basis (around 4.02%)

If you let $13,000 sit on your LOC for 12 months you'd end up owing around $13,522

I have quite a bit more than $13,000 used on my LOC and my monthly interest charge last month was around $68

 

Edited by Toad
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Yeah 3.95% is the APR or annual percentage rate. So if they are compounding monthly your monthly interest is 3.95%/ 12 months.

0.0395/12= 0.00329% per month 

$13,000 x 0.00329= ~$43 dollars a month (not accounting for compounding) 

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1 hour ago, Toad said:

It's only 3.95% per year.

Compounded monthly means they get to charge you interest on interest which means you effectively pay slightly more than 3.95% on an annual basis (around 4.02%)

If you let $13,000 sit on your LOC for 12 months you'd end up owing around $13,522

I have quite a bit more than $13,000 used on my LOC and my monthly interest charge last month was around $68

 

 

34 minutes ago, healthlaw said:

Yeah 3.95% is the APR or annual percentage rate. So if they are compounding monthly your monthly interest is 3.95%/ 12 months.

0.0395/12= 0.00329% per month 

$13,000 x 0.00329= ~$43 dollars a month (not accounting for compounding) 

thanks guys!! that is way more affordable than I thought, even with compounding taken into account. I wouldn't have to make interest payments during school but I'm now strongly considering it now that I know prime is an annual rate. 

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8 hours ago, bigfudge2017 said:

 

thanks guys!! that is way more affordable than I thought, even with compounding taken into account. I wouldn't have to make interest payments during school but I'm now strongly considering it now that I know prime is an annual rate. 

Always a smart idea to stay on top of interest when you can (coming from someone who didn’t but wishes they had)

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Correct me if I'm wrong but you got the Scotia LOC, right? 

You should confirm that your interest compounds monthly. I've heard of some people, and I'm in the midst of negotiating this now, that don't have compounding interest. 

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2 hours ago, NFLDFree said:

Correct me if I'm wrong but you got the Scotia LOC, right? 

You should confirm that your interest compounds monthly. I've heard of some people, and I'm in the midst of negotiating this now, that don't have compounding interest. 

Yes I went with scotia.  That’s unreal.. I didn’t know you could do that, but it’s too late as my line has been finalized. That being said I hope you’re successful with that. As long as I pay the interest every month there won’t be anything to compound anyways but not having to worry about that would’ve been even better

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12 hours ago, NFLDFree said:

Correct me if I'm wrong but you got the Scotia LOC, right? 

You should confirm that your interest compounds monthly. I've heard of some people, and I'm in the midst of negotiating this now, that don't have compounding interest. 

Can you clarify "don't have compounding interest" part?

What happens to the interest then? 

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On 2/9/2019 at 8:09 AM, Luckycharm said:

Can you clarify "don't have compounding interest" part?

What happens to the interest then? 

Let's say you use 10k of your LOC the first day you get it for simplicity. A prime interest rate of 3.95% is about 0.33% a month, so you'll pay $33 in interest every month. 

The way my Scotia loan works is that the interest payments come right off of the LOC... So at the end of 1 month in this example I would owe $10,033, but for month 2 rather than calculating interest payment on $10,033 the next interest payment is still $33. So over the course of 12 months you'd pay $400 in interest payments added onto your LOC, but you don't have to pay interest on that, which would be the compounding. 

I'm still confirming this with the agent that I spoke with, but I've heard of people negotiating this. Obviously, as @bigfudge2017noted if you are going to make your interest payment each month this doesn't matter. 

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8 minutes ago, NFLDFree said:

Let's say you use 10k of your LOC the first day you get it for simplicity. A prime interest rate of 3.95% is about 0.33% a month, so you'll pay $33 in interest every month. 

The way my Scotia loan works is that the interest payments come right off of the LOC... So at the end of 1 month in this example I would owe $10,033, but for month 2 rather than calculating interest payment on $10,033 the next interest payment is still $33. So over the course of 12 months you'd pay $400 in interest payments added onto your LOC, but you don't have to pay interest on that, which would be the compounding. 

I'm still confirming this with the agent that I spoke with, but I've heard of people negotiating this. Obviously, as @bigfudge2017noted if you are going to make your interest payment each month this doesn't matter. 

but the $33 interest will be added to the outstanding loan amount. Interest will be based on outstanding amount unless you pay the interest separately. 

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8 minutes ago, Luckycharm said:

but the $33 interest will be added to the outstanding loan amount. Interest will be based on outstanding amount unless you pay the interest separately. 

I'm not really sure what to say. I just noted in that message that that isn't what happens in this scenario (that I've heard others get and I'm still working out with my agent). 

You pay interest on the loan amount that you use. Not the interest payments. So no, the interest is not based on the outstanding amount of the loan because interest doesn't compound. It's a circular argument where you've just said "no that doesn't happen" lol

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1 hour ago, NFLDFree said:

Let's say you use 10k of your LOC the first day you get it for simplicity. A prime interest rate of 3.95% is about 0.33% a month, so you'll pay $33 in interest every month. 

The way my Scotia loan works is that the interest payments come right off of the LOC... So at the end of 1 month in this example I would owe $10,033, but for month 2 rather than calculating interest payment on $10,033 the next interest payment is still $33. So over the course of 12 months you'd pay $400 in interest payments added onto your LOC, but you don't have to pay interest on that, which would be the compounding. 

I'm still confirming this with the agent that I spoke with, but I've heard of people negotiating this. Obviously, as @bigfudge2017noted if you are going to make your interest payment each month this doesn't matter. 

Edited: I just PM instead

Edited by SallGoodMan

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There are multiple components to bank financing for LOC's.

"Calculated daily" - this means that the bank will take the balance of the credit each day and multiply it by 1/365th of the annual interest rate. e.g. if your balance is $13k, then each day they will calculate the interest owing by multiplying the $13,000 by 3.95%/365 (~$1.4068/day).

"Compounded monthly" - at the end of the month, the bank will add up the calculated daily interest and the total amount will be credited from your LOC. e.g. If you withdrew $13,000 on January 1, on February 1 you would have $43.61 draw down on your LOC.  The reason this is called compound interest is because starting on February 1, the daily calculated interest would be $13,043.61 (original Jan. 1 balance plus the interest charged on Feb. 1) multiplied by 3.95%/365 (~$1.4116/day)

For most standard lines of credit, the minimum payment is the interest.  This way it is impossible to compound the interest because you would pay the interest using other monies.  However, for PSLOC's, banks will normally allow the interest payment to come from within the LOC as many students do not have the ability to make minimum monthly payments while attending school.

Okay... someone tell me I'm wrong 😛

 

 

Edited by thebigchange
Forgot to close bracket on second paragraph
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22 minutes ago, thebigchange said:

There are multiple components to bank financing for LOC's.

"Calculated daily" - this means that the bank will take the balance of the credit each day and multiply it by 1/365th of the annual interest rate. e.g. if your balance is $13k, then each day they will calculate the interest owing by multiplying the $13,000 by 3.95%/365 (~$1.4068/day).

"Compounded monthly" - at the end of the month, the bank will add up the calculated daily interest and the total amount will be credited from your LOC. e.g. If you withdrew $13,000 on January 1, on February 1 you would have $43.61 draw down on your LOC.  The reason this is called compound interest is because starting on February 1, the daily calculated interest would be $13,043.61 (original Jan. 1 balance plus the interest charged on Feb. 1) multiplied by 3.95%/365 (~$1.4116/day)

For most standard lines of credit, the minimum payment is the interest.  This way it is impossible to compound the interest because you would pay the interest using other monies.  However, for PSLOC's, banks will normally allow the interest payment to come from within the LOC as many students do not have the ability to make minimum monthly payments while attending school.

Okay... someone tell me I'm wrong 😛

 

 

I thought they use 360 days instead of 365/366

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On 2/6/2019 at 11:43 PM, bigfudge2017 said:

Hello all, 

figured I would ask this here because I’m financially illiterate and because there’s no one I know that would know. 

My LOC agreement states that interest on my principal will be calculated daily and compounded monthly. The rate is at prime (3.95). 

Assuming my first year tuition will be ~13k, and I let that balance sit on the LOC for a year...does that mean that each month they’re gonna calculate ~4% interest on 13k, and add it onto my total amount borrowed? The way I worked it out, that means after 12 months I’d owe a total of 19k. That’s about 500 in interest per month.... I may have that wrong and I really just want to understand what I’m getting into with this LOC before I start drawing on it like a kid with no impulse control and no parental supervision.

 

thank you!

What ^Toad said

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On 2/10/2019 at 1:03 PM, NFLDFree said:

I'm not really sure what to say. I just noted in that message that that isn't what happens in this scenario (that I've heard others get and I'm still working out with my agent). 

You pay interest on the loan amount that you use. Not the interest payments. So no, the interest is not based on the outstanding amount of the loan because interest doesn't compound. It's a circular argument where you've just said "no that doesn't happen" lol

Any line of credit that you do not pay the interest from your own resources will end up having "compounded interest". In your example above, if you borrowed $10,000 and it accumulated $33 in interest during month 1, your balance owing will be $10,033 starting in month 2 since that interest gets added to the balance at the end of month 1. The interest for month 2 will now be calculated on a balance of $10,033 and interest will be charged on that full amount.

This is not something you can negotiate with the banks, you either have the means to make that interest payment each month to avoid the compounding effect or you don't. If anyone tries to tell you otherwise they are 99.9% likely to be misleading you, knowingly or not.

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