Amortizing Loan...Does This Automatically Mean Interest Accrual is 30/360?
I'm trying to model an amortizing loan, pretty plain vanilla. Assuming you have a 10 year loan on a 30 year amortization period, does this automatically mean interest accrual method must be 30/360?
I've seen some lenders quote actual/360, or perhaps actual/365, but those were for interest only loans.
Is it right to assume that if a loan is amortizing, the interest accrual method is 30/360? I guess maybe you can switch to an actual/360 in the PMT function, but that would be messy and the payments would change from month to month?
Not sure I ever looked at load docs that closely with regard to interest calcs, but at least for partial payoff months (and first month) a daily interest calc is needed and I'd presume it specified in the doc (or its method calculation)
That said... for excel... when you use formulas like PV, PMT, RATE, NPER.... they have no concept or knowledge of days/months/years.... If you specify NPER in months (like 360 for 30 years), then divided the interest rate by 12 (standard method)... it is making a "pmt" of 360 periods.... those could be days, months, years, decades.... you just know and interpret it as months.
Everytime I've used PMT as above for mortgage calcs, it came back with the monthly payment as stated by the lender, so, I'd guess the works. For daily interest charges (like for a payoff), I kinda think I have seen rate/365, but can't remember, the difference vs. 360 is probably never been enough to worry about!
No, an amortizing loan does not always imply 30/360 interest accrual. 30/360 & actual/360 are just ways to determine what portion of the fixed payment is the interest paid to the lender; the remainder gets applied to the principal. Two identical amortizing loans, one 30/360 & the other actual/360, would actually have the same monthly payments, just different allocations of interest.
Example:
$1M Loan / 4% Interest Rate / 30-yr Ammoritization / March Payment (31 day month)
30/360:
Actual/360:
In the Actual/360 scenario, doesn't that mean that the loan won't fully pay off over a 30 year time frame?
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