Thread: How interests are calculated??

Wongo, to my knowledge, interest is usually calculated on a daily basis. It may be different for some types of investment. I know that my offset account against the home loan earns interest on a daily basis. I am sure some other blokes (and gals) on the forum who work in the financial industry will have a more complete answer.
Les

If you borrow from the bank then interest is calculated on the daily overdrawn balance so any increase in borrowing, even for a day or two, is charged for but if you lend the bank money then interest is calculated on the minimum monthly balance that you maintain.

So they slug you both ways and make huge profits.


Peter.

Originally Posted by Wongo

Let's say my bank balance is $100 debit at the beginning of the month, then it goes up to $500 in the middle of the month, then it goes down to $50 at the end of the month.

If interest is calculated at the end of the month at 1% per month

What is the interest?

Is it $50 X 0.01 = $0.5 (based on amount owning at the point of calculation) unlikely

Or is it $500 X 0.01 = $5 (based on the highest amount owning during in that period) possibly

Or is it average amount owning during that period unlikely

Or is it something else?? possibly

the calculation method varies by bank and banking product.
Morgage interest is (these days) usually calculated monthly on the daily outstanding balance -- so if you make two $500 repayments in a month the interest will be different to what it woudl be if you make a single $1000 repayment.

credit card interest is often calculated on the maximum outstanding balance -- in your example that would be the starting balance of $100 plus total added debits.
So if over the course of a month you cleared the starting balance and put another $500 on the card, the interest could be calculated as
$100 x 0.01 = $1
PLUS
$500 x 0.01 = $5
Total $6

Thanks