Sum of the digits interest allocation

Sum of the digits interest allocation

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I know how to deal with the 's.o.d' calculations for a conventional loan/hp - but what about one with a baloon payment, eg one of those options agreements (not contract hire or lease).
David

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By User deleted
26th Jan 2002 16:41

minimum lease payments
Do check whether the balloon payment is part of the minimum lease payments. In some agreements there is an option to walk away without paying the balloon payment.

If it is not part of min lease payments, you capitalise the present value of the minimum lease payments. sod works as normal as the payments involved are all pretty much the same.

Strictly in this case the asset capitalised is an intangible asset - the right to use the asset for a period of time - not the asset itself. This intangible asset should be fully depreciated by the time the balloon payment is due.

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By User deleted
22nd Dec 2001 10:57

Area of rectangle and triangle
If you insist on the s.o.d. method: draw a graph of balance against time. The s.o.d. method involves a straight line instead of a curve. You can now calculate the area of the rectangle and the triangle.

The interest should be in proportion to the height of the graph. The interest appling to the rectangle is a constant amount per payment while the interest appling to the triangle reduces in the normal s.o.d. way. You should NOT have a large interest amount to go with the large payment.

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By AnonymousUser
20th Dec 2001 17:17

see calculator at http://www.e-gismos.com
there is a calculator at http://www.e-gismos.com that calculates loans with balloon payments.

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By Accounting WEB
18th Dec 2001 23:39

SOD it!
Remembering, of course, that the SOD basis is merely an approximation in the first place, an attempt to get as close as possible to real compound interest, so there are a few ways you could do this. Here's mine:
Example, 35 repmts of £100 then a final paymt of £2000.
Divide the final paymt by the usual one, this equates to 20 more repmts all at once. So re-do the SOD using 55 repayments, and the final 20 bits of interest all relate to the final payment. Add Uncle Ben's stir-in sauce and simmer for 22 mins, bingo! How about that then?

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By neileg
19th Dec 2001 09:42

Technology
In these days of spreadsheets, why not just drop the figs into one, and calculate a true interest charge.

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