Why Bike Loan....

[kzone]

Why is bike loan interest calculated on a straight line basis and not on depreciating balance?

[Etan]

but some bank do same interest calculation as car loan.. could be due to lower loan amount

[ocping]

Simple...

 

1) niche market; no competition for giving out bike loans

 

2) easier to understand (but actually way more expensive) = $$$ profits

 

Notice how they also charge you fees if you want to pay off the loan? From finance we know that's complete bullshit... it's all just cash-grabbing.

[lkm]

Why is bike loan interest calculated on a straight line basis and not on depreciating balance?

 

Honestly, I think it's because it's easier for the vast majority of people to understand and perform their own calculations. You can ALWAYS calculate the *effective interest rate* (ie, based on the remaining balance) from that "simple interest rate" (calculated based on principle amount) that you normally see in bike / car loans. But it'll take a financial calculator or something like excel to do so, and a little know how to do so.

 

Other reason is also marketing. "Effective interest rate" numerical figure is ALWAYS higher than "simple interest rate" figure. So for the uninitiated, that lower figure may seem more favourable. For example, a $10,000 loan for 5 years at a 10% simple interest works out to a monthly payment of $250. The *effective interest rate* (calculated from the above example) on a monthly-rest basis is 17.3%. So 1 bank tell you 10% simple interest. The other bank tell you 17.3% effective interest. Which do you think the non-finance trained ordinary man-on-the-street will choose? Actually, it's exactly the SAME!