Credit Union APR calculator

Credit Union Cost of Borrowing Calculator

NOTE: The fields should automatically update when you move from one field to the next.

About The Calculator

There's been a long running debate in the "Great Financial Debates" section of the Irish personal finance site askaboutmoney concerning APR calculations and the use of APR as a measure of the cost of borrowing. In particular some people (myself included) believe that the Credit Union requirement that you keep money on deposit while taking out a loan from them can make credit union borrowing quite expensive.

While this seemed obvious, I was always curious as to whether this condition could be quantified in terms of the standard measure for credit cost, APR. There didn't seem to be any obvious way of using the financial functions of Excel to do it and it was difficult to imagine how the savings rate and the lending rate would combine. Funnily enough, it was only after figuring out the formula in the 1995 Consumer Credit Act that it became obvious that the requirement could be very easily incorporated into the formula.

Every credit union is different and so this calculator only handles the specific case where the credit union insists that you clear your loan balance before being able to draw down from the mandatory savings. Some apparently allow you to reduce your savings as you pay off the the loan; such a policy significantly reduces the real cost of credit for the borrower.

Technical Notes

The calculator works out the real APR cost of credit union loans by numerical methods (the bisection method) using the formula given in Schedule 4 of the Consumer Credit Act 1995. The formula defines the APR as the (annualised) interest rate which makes the sum of the present values of all cash flows to the institution zero.

A caveat: this calculator was written quickly over the course of a couple of evenings. You are welcome to check the source here for obvious mistakes. It's not heavily commented but is pretty simple. To make the coding easier and quicker, I used Java floating point mathematics which would normally be a no-no for financial calculations. To implement this calculator properly/formally (with regard to numerical methods) would require a bit more effort. If you do spot something dodgy with the calculator I am contactable through an email account at hotmail.com under the user name, dara_gallagher.

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