Microfinance Practice: Re: [MFP] APR/EIR calculation using MFT Pricing Tool [1 Attachment]

Hello Awais,

I'll give you some short answers on your questions, and with some follow-up work, everything should be clear. For others on the listserve, Awais is using my Price Calculator software that can be downloaded here:

http://www.mftransparency.org/resources/calculating-transparent-pricing-tool/

Much of pricing has to do with definitions, and that is where I think most of your questions come from.

First, and UPFRONT FEE is one that is paid at disbursement, before getting the loan, or right at the moment of getting the loan. Upfront fees show up for Period 0 in the model. Upfront fees do not affect the amounts paid starting in Period 1. If there is a fee that the client pays with each payment, that is called an ONGOING FEE in the pricing calculator.

The amount paid each month isn't affected by fees, but there are issues that determine the amount each month. The tool allows you to indicate "equal installments (amortized)" up in the dropdown in H3. This would give you the same amount each month, as you indicate. If you chose "equal principal" from that dropdown, you would get unequal payments each month if the product had declining balance interest, because the amount of interest each payment would reduce.

As for the PERIOD column (Col H), that is the IRR (internal Rate of Return) based for the "period" — the amount of time between payments. Maybe a week, maybe a month. The software takes the period rate and converts it to an annual rate (APR and EIR columns).

As for the INCREMENT column (Col G), that is the DIFFERENCE between the APR figures for the current row and the preceding row. For example, if the loan shows an APR (interest) of 40% and an APR (interest + fees) of 42%, then the INCREMENT is 2%. This calculation shows you how much impact each price component has on the overall price.

Attached is a snapshot of an example as I'm describing. I hope this answers your questions, and if not, let me know.

Chuck

On Jul 8, 2015, at 12:35 PM, Muhammad Awais mawaisq@hotmail.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Hi,

I am using the MFT pricing tool to calculate the APR/EIR.

I have noticed that equal installment is constant irrespective of increasing/decreasing/deleting the upfront fee. For example a 12 months loan of USD1,000 @ 1% per month with USD10 upfront fee has (equal) installment of USD88.85 and this installment amount remains the same without the upfront fee.Should the equal installment size has some relationship with the upfront fee?

I will be thankful if someone can explain followings in the MFT pricing tool:

1) How increment (G13) is being calculated for upfront fee?

2) How period (H9) is being calculated and why its results are in %?

Regards

Awais