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Can someone tell me what I'm doing wrong here?

If I have a $56,500 loan and the interest rate is 7.9% how much will I owe after 8 months?

I thought this would be fairly simple. I would compound the interest monthly:

After month one = 56500 * (1 + 0.079/12)
After month two = (56500 * (1 + 0.079/12)) * (1 + 0.079/12)
etc...

Since I'm doing this in Excel, I just refer to the month one cell in the month two formula. After 8 months - I have an answer of $59,545. But the bank says I actually owe $58,889.08

I'm at a loss for how they got their number. I tried my calculations with the interest compounding daily:

After day one = 56500 * (1 + 0.079/365)
After day two = (56500 * (1 + 0.079/365)) * (1 + 0.079/365)
etc...

And I get an answer of $59,641.07

Which leads me to believe I'm doing it wrong. I'm trying to make calculations about the loan over the next 30 years and, as you can imagine, the margin of error I have in eight months extrapolated to 30 years is probably huge.

Can anyone tell me what I've done wrong?

Edit: the loan above is in the context of a Grad Plus Loan (a student loan that is currently in deferment). Perhaps that information will help.

  • It could always be a bank error in your favor... – Alex Becker May 22 '12 at 14:12
  • It might be a good idea to make payments on the loan :) – David Mitra May 22 '12 at 14:17
  • There are many ways of expressing interest rates. If the 7.9% is effective annual rate instead of the nominal rate then your method will definitely over estimate the amount owed. If it is effective APR (with fees included) then even more so. You need to find out more about the loan for the question to be answerable here (or at money.SE): you need to know what kind of rate is quoted to you, you need to also know the compounding period. – Willie Wong May 22 '12 at 14:23
  • @David Mitra - it's a student loan that is currently in deferment. I'm trying to figure out how much the loan will be at graduation and how the interest will accrue later. – Rob P. May 22 '12 at 14:38
  • @Willie Wong - Thank you for your response. I know it's a Grad Plus Loan - but I can't for the life of me find any more information; not even on the website where I can manage the loans. It just says 'Interest rate 7.9%' I will keep looking – Rob P. May 22 '12 at 15:56
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You say your loan is in deferment. How much longer will your loan be in deferment?

I see a couple of possible scenarios here based on the information you give. I don't have a lot to go on or understand how you got the bank to give you a loan amount 8 months down the road. (is it exactly 8 months?)

Scenario 1. What if you your loan is only on deferment for 5 more months and the bank is taking into account minimum payments you would be making on the loan for the last 3 months in the number they gave you.

Scenario 2. Is there an off chance you have more then 1 loan bundled into this amount? Did you take it out all at once? I know that when I graduated I had X amount of student loans which I thought all were at 6% interest but it turned out that the 3 loans I took over the years actually had varied in the interest rate. So that might account for the difference as well..

But if your trying to make realistic calculations of your loan over the next 30 years. You will need to consider payments on the loan as well.

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