HIGH FINANCE

Figure your payment rates the easy way

By Philip Bate, PhD

Most people are understandably confused about interest rates, amortization, compounding periods, and other aspects of "high finance." Advertisements don't help, as they are essentially designed to make the transaction look as good as possible. The easiest way to gain understanding of such matters is to work out the problems for yourself. Pick a loan amount, and see what your payments would be at different interest rates, or over varying periods of time. Or set up a savings program and see what $100 a month can add up to in 10 or 20 years.

High Finance is a simple program makes working such problems easy. It even prints out complete amortization schedules for paying off a loan or mortgage. Whether at home or at the office, High Finance can help you plan your finances more knowledgeably.

Getting Started

Type in Listing 1, FINANCE.BAS, check it with TYPO II, and SAVE a copy to disk before you RUN it.

The program uses a menu system to make figuring your finances as easy as possible. The Main Menu gives you six choices -- Amount of Payment, Number of Payments, Amortization Schedule, Amortization with Varying Payments, Appreciation Schedule, and Savings Schedule. When you pick any of these choices, prompts will tell you what data to enter, and give you the option to print your results. Enter interest rates as if followed by percent signs, not as their decimal equivalents. For instance, ten percent should be entered at the prompt as 10 -- not .l0 . Do not enter any commas in your dollar amounts. For example, one million should be entered as 1000000 not 1,000,000.

High Finance was designed to print results on any Epson compatible printer. If you need to modify the program for your printer, the printer subroutine is contained in lines 1310 to 1410. Plenty of REM statements have been added to tell you what each line should do, so you can replace the existing codes in each line with the corresponding codes found in your printer manual.

Amount of Payment

Amount of Payment figures how much your monthly loan payments would be. You enter the amount and duration of the loan, and the interest rate. In addition to determining your monthly payments, the program tells you the total amount of interest you would pay over the life of the loan. These figures can be very useful when considering the purchase of a new car or house. For example, a $50,000 home loan for 20 years at 10% interest would mean a monthly payment of $482.51. The same loan for 30 years would have a payment of $438.79. However, note that the interest paid for the first loan is $65,802 and $107,964 for the second. By paying a little more (only $45 a month) over a shorter period, you can save nearly $50,000 -- the full amount of your original loan!

Number of Payments

The Number of Payments option lets you set the amount you can afford to pay per month, and see how long it would take to pay off your loan. This option is particularly useful for those on a fixed budget. However, if the amount of payment you enter doesn't even cover the interest charged every month, the program will give you an error message. Just as no bank will give you a never-ending loan, this program can't figure an infinite time to payoff. Try making higher payments, or use the Amount of Payment option to determine a range of workable payment amounts.

As with the previous option, you will also see the total amount of interest you would pay. The longer it takes you to pay off the loan, the more interest you will pay. A long term home loan could end up costing you two or three times the cost of the house itself!

Amortization Schedules

The third and fourth choices on the main menu let you make payment schedules, showing the amount of your payment, the amount of interest charged you, the amount of the principal paid off (your payment minus the interest) and the balance remaining to be paid.

The simpler Amortization Schedule generator assumes that your payments will all be the same, and works automatically to show you your schedule of loan payments. At the prompts, enter the amount of the loan, the interest rate, and the number and amount of payments. Your complete schedule of payments for the life of the loan will be shown.

Amortization with Varying Payments lets you pay varying amounts. Initially, you enter the amount of the loan and the interest rate. Then, for each payment period you enter the amount you actually paid - or plan to pay. If you skip payments or pay off early, you're likely to have added penalty charges, so you can add those separately. If you make no payment or have no charges, you can just press [RETURN] to enter a zero amount.

You can use the Varying Payments option to determine how much skipping payments will cost you in the long run, or to see if paying off your loan early will save as much in interest as it costs in penalty charges.

Appreciation & Savings

If you'd rather save up for that big purchase, or want to save far your retirement, High Finance's last two features can help. The Appreciation Schedule tells you how much interest you will earn on money deposited for a certain amount of time, at a set interest rate. You can compare short term and long term CD's, bonds, Treasury Bills, or other such one-time investments.

The Savings Schedule goes even further, by allowing you to add monthly to your savings. You can see just how much you will have after 20 years if you start putting $100 a month in your savings account right now. (At 4% interest, you would have $36,677.47, some $12,677.47 of that from interest. Of course, as a wise High Financier you would have transferred some of those savings to better paying investments, so your actual total would be considerably higher.) I found the Savings Schedule very useful in comparing whole life insurance (and endowment programs) with term life insurance. Term is much better, provided that you can invest in other things as well. If you are buying a house, for instance, put the difference between the term cost and the whole life cost into prepaying the home loan. It's usually smarter to pre-pay your mortgage rather than put your money into savings, unless you have a very low-interest mortgage, and high-yield investments. Interest on mortgages tends to be in double-digits these days, while savings accounts return only 4-6%. Whole life and endowment plans return even less than that.

A Hypothetical Care

The following example should give you a feel for the possibilities of High Finance. Let's say you own your own home with an original $50,000, 30-year mortgage at 10% interest. Your payments are $438.79 per month, and you've been paying for two years. If you plug these figures into the Amortization Schedule, you can see that your balance is now $49,414.90.

You also have a savings account at your friendly local bank, with $1,500 at 5% interest. Of course, interest on that account is compounded daily, which gives you an effectively higher annual interest rate. Or is it? The phrase "compounded daily" sounds great, but can be misleading. In this case, $1,500 at 5% simple interest for one year returns $75. With the interest compounded daily, the same amount would earn you a grand $76.30 after one year. Small interest rates, even compounded don't return much. Still, using the Appreciation program you can see that, with $1,500 at 5% interest, compounded 365 times a year, you'd end up with $6081.86 in your account (a profit of $4581.86) after 28 years, the time remaining on your mortgage.

If you prepaid that money into your mortgage, on the other hand, you'd save on interest charges. To see how much, use the first menu option, Amount of Payment. Enter the balance and time remaining on your mortgage, or $49,414.30 at 10% for 336 months (28 years). The results show that you would pay $98,015 in interest. Next, use the Number of Payments option to see what the difference would be with a balance of only $47,914.90 the current balance less the amount in savings. Enter $47,914.90 at 10% with a monthly payment of $438.79, and you'll see that your total interest is now only $79,773. This gives you a savings of $18,242, almost four times the $4,581.86 you'd get from the bank! Even better, you'll only be paying for 291 months instead of 336, saving almost four years of payments.

Try adding just $20 a month to your house payment and see how much you will save, and how much sooner you'll pay off that mortgage. Your own house might be your best investment. (Some banks add penalties to make up for interest lost by such repayments. Make sure you take into account any penalties for early payoff.)

Savings and Tips

You can find other ways to save money by experimenting with High Finance. For instance, try figuring out how much you pay per year on your credit card accounts, with their interest rates around 18%, or higher. Get a bank loan at 10-12% and pay off your credit cards each month, and you'll be surprised at how much money it can save you.

Now, look at the automobile market. Some of the deals being offered sound really good, until you check them out. For example, a dealer offers a $10,000 car you want, with either a $1,000 rebate, or a 4.9% loan for two years. You can borrow from the bank at 15.5% interest to buy the car outright and get the $1,000 rebate, and if you pay the loan back in two years your total interest charges will be $1,524.48. Add this to the $9,000 price of the car, and your total cost for the car is $10,524.48. Figuring the $10,000 at 4.9% for two years, your interest payments will be $10,518.48, for a total cost of $10,518.48. You actually save only about six dollars with the reduced interest rate, and either way your monthly payments are about $440.

Where car loans really get you is on long-term loans, like five years (60 months). The same car, financed for 60 months at 15.5% has a total cost of almost $13,000. You end up paying $4,000 in interest on a $9,000 loan, but the payments are cut in half. For all too many people in our affluent society, that's more important than the extra interest -- but in the long run, all that interest hurts. Consumers should always watch out when a deal seems too good. For that matter I suspect that to afford a $1,000 rebate, manufacturers have to jack up the price that much in the first place.

With long term loans, like mortgages, even half a percentage point in interest can make a big difference. If you need a loan, shop around carefully. Get the interest rates from the bank, and run them through High Finance to see what your interest and payments will be. With this program, it's easy for you to check the difference even a tenth of a point can make. If you've got an 8-bit Atari, you already know that you can get quality at a low price -- now you can look for similar savings in the world of High Finance.

Philip Bate Ph.D. of Jupiter, Florida became an orthomolecular psychologist after working as an electronics engineer at Cape Canaveral in the 1950s. His Mighty Lister inventory database ran in the January, 1989 Antic

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