Even banks can (& do) get loan calculations wrong

 By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

04 October 2015

In February this year, Nancy borrowed Sh231,000 from Standard Chartered Bank. The loan is repayable in 36 months (three years) at 18.5% interest rate. The monthly instalment payable is Sh8,409 and she made the first one in April. However, by this time, the bank informed her that the loan had grown to Sh237,409.51!

Nancy wants to clear this loan within the next six months so she asked the bank what it would take to do that, but the answer they gave her was not clear: “They told me to just make 'capital reduction' payments”, she writes.

Still, she asked for the balance in August and the bank said it was Sh198,820. Then in September, she paid the usual Sh8,409 plus an additional Sh20,000 'capital reduction' amount.

Nancy also went to Co-Op Bank and asked if they could take over the Standard Chartered loan and give her 6 months to pay. They said yes, but at an interest rate of 21.95%. The monthly instalment for this was calculated at about Sh33,000. “Is this a good move?” Nancy asks.

Well; I started by doing a quick check of the figures quoted by the banks. According to my calculations, the original monthly instalment stated Standard Chartered is correct – Sh8,409. However, there is a small discrepancy in the balance they gave Nancy in April: I get Sh238,177; that is, mine is Sh768 higher.

Furthermore, my calculations show that the balance in August should have been Sh212,921 and not the Sh198,820. There is a significant difference of over Sh14,000. I have tried changing the inputs into the formula and I cannot figure out how the bank got its answer.

In addition, it was a mistake for Standard Chartered Bank to ask Nancy to pay Sh8,409 in April, yet the loan had already accumulated some interest during the months of February and March. In order to maintain the agreed 36 months (starting from February), the instalment should have been revised to Sh9,053 in recognition of the new loan balance (Sh238,177).

If we ignore the Sh20,000 additional payment made in September for a moment, it turns out that by paying Sh8,409 per month, Nancy would still have an unpaid balance of Sh28,512 in January 2018. But this is the 36th month counting from February 2015!

This would be a source of much dispute between her and the bank. I can picture her shouting: “I have diligently paid all the instalments you told me to and now you claim that I still owe you more money! This is daylight robbery!”

Still: after paying the Sh20,000 “capital reduction” amount in August, how much monthly instalment should she pay to Standard Chartered in order to clear the loan in six months? My calculation yields Sh32,910.

If the current loan balance (Sh183,133) is taken over by Co-Op Bank at the quoted 21.95% for six months, the monthly instalment will be Sh32,505. The difference is small, but Nancy must be careful because the new bank might charge a “mobilisation” fee.

The moral of this story: be careful of the figures you get from the bank; they can (and do) get it wrong!