I was approached by a client asking me why does your bank use 360 days instead of 365 days when calculating the interest payment of a loan. I told him it’s some sort of a convention, but he wasn’t fully convinced. I looked up Wikipedia, but it doesn’t provide much detail. Why 360 Days Instead of
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interest rate greater than the nominal interest rate. Using the "365/360 US Rule Methodology" interest is earned for 365 days even though the daily rate was calculated using 360 days. Using the "Monthly Payment Methodology" interest is earned on 12 thirty day months or in effect 360 days.
On November 21, 2012, the Supreme Court of Ohio weighed in on the wave of class action lawsuits across the country challenging the 365/360 method for computing interest.
The HP 12c calculates simple interest based on either a 360-day basis or a 365-day basis. Additionally, with the accrued interest in the display, the total amount can be calculated (principal plus accrued interest) by pressing. To calculate the interest on a 360-and 365-day basis: Key in or calculate the number of days, then press.
The difference between a 360-day and a 365-day year is relevant to the calculation of prepaid or per diem interest. This is interest for the period between the loan closing date and the first day of the following month.
booklet describes in detail how CU*BASE handles the 360-day interest calculation process. note: remember that if your credit union does not need to adhere to the strict guidelines required by the secondary market, you may prefer to set up your mortgage products with the 365-day interest calculation instead, so
Banks most commonly use the 365/360 calculation method for commercial loans to standardize the daily interest rates based on a 30-day month. 1 To calculate the interest payment under the 365/360 method, banks multiply the stated interest rate by 365, then divide by 360. However, due to the numerator and denominator not matching, the 365/360 method has been held to increase the effective interest rate by 0.01389 in a non-leap year.
How it works: the lender pretends there are 360 days in a year when calculating the daily interest rate (6% / 360 > 6% / 365), then charges interest on 365 days (366 during a leap year). In using the 365/360 method on a loan with a rate of 6%, the lender will actually be charging an annual rate of 6.083% (.06 / 360 x 365).
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