Saturday, July 7, 2007

How to Compute Effective Interest Rate?

I have googled but failed to find a formula to compute the EIR for the flat interest rate usually quoted on motor loan. Most articles suggest asking the finance company or bank to provide the EIR and some stated a good estimate is EIR = 2 x flat interest rate. Is the estimate good or even fair?

Being trained in Six Sigma, I cannot help wanting to be accurate to an acceptable precision and research a little into how a banker would do that computation. I stumbled upon a template within Microsoft Excel named “Loan amortization” which is usually used for illustrating housing loan but I managed to tweak it into a tool to compute both the Effective Interest Rate and the Nominal Compound Interest Rate. There is a manual step involved to set a rate that will match the total loan including incurred interest with the assistance of an adjustment indicator. Click here to get the latest version of the tool.

Hope you will find it useful! And as usual, your comments are welcome.

1 comment:

poc said...

you may find the excel working sheet here