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Your bank may be ripping you off

How does your bank calculate interest expense on your loans?  If they use a 365 basis to calculate your daily interest factor, and then calculate the monthly interest based on actual days, then in February they will be getting an extra day's interest from you. 

Any interest charged during a leap year should use 366 days to calculate the daily interest factor. 

Let me know what you find out.

Answers

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Scott,
Overall I dont feel so bad about being ripped off for a days interest in February every four years. There seem to be much bigger rip offs when it comes to FX exchange rates, wire fees, and bank service charges, and the banks seem sensitive to how we regard the fee process. A recent statement from one local CA bank had more pages devoted to justifying the service fee with all kinds of balance and transaction data, than it did for reporting the transactions for the whole month!
Here are some tips I have employed to reduce my bank charges (and frustration)

I changed my accounts to Wells Fargo business account. If I agree to an automated transfer of $100 from my checking to my savings account every month, there will be no service fees on the accounts! (There may be other banks with similar schemes!)

Set up automated international wire facilities with your bank for recurring wire payments. When I initiate a wire from the branch, or with bank assistance, the fee for an international wire is $45, when I make the same wire by telephone through a pre established recurring telephone wire service I am charged $15. Again these are WF rates but the same principle may apply with your bank. In addition I save time and effort by being able to make the call any time from my office, rather than being limited to bank opening hours.

Finally, if you make foreign currency wire payments, you should check the FX rate and not worry so much about the stated service fee. There is far more to be gained or lost in the FX rate used than the cost of the wire. The banks generally offer bad deals because their volumes at a branch or region are low or infrequent and they need to cover their risks. When planning a FX wire, I have asked a specialist FX payment company for a quote on my actual terms before I go to my bank and place my deal. ON three out of three occasions I have had the opportunity to get a better deal from the FX specialist than my bank.

I hope these tips may help offset that lost interest on Feb 29th!

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

Scott,

The method of interest calculation should be specified in your loan agreement. Most of the ones I have seen follow the LIBOR convention, which is actual/360. Since LIBOR is the rate at which banks borrow and lend to each other, they are ripping each other off as well, if that provides any comfort.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

To further David's comment, the former CFO at a client complained about nickels and dimes (literally) to the point that the bank pulled the financing - they were loosing money by spending time on the phone....

Also, last I heard, it won't be an issue for another four years or presidential election year, which ever comes first....

Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

The 366 day factor is minor and occurs every four years A more common calculation uses a "360 day" year for the daily rate multiplied by 365, a more significant factor. Often this factor applies only to certain circumstance under the agreement and not regular interest due calculations.

Anonymous
(Financial Reporting Manager) |

Seems like a immaterial difference...besides, for what its worth the bank regulators test these calculations regularly.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

One of the early scams (which keeps re-appearing) had to do with rounding pennies. Typically they first occurred in Department Stores, with the 1/2 pennies being siphoned into a dummy account.

We're talking hundreds of thousand of dollars....

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