How Daily Financed Payments Are Set Up
Making daily payments for an item can be a manageable way to budget and acquire things you need or want. Whether it’s a subscription service, rent-to-own agreement, or a similar arrangement, here’s a straightforward guide on how to buy an item and pay for it on a daily basis:
Understand the total cost of the item you’re interested in. Calculate the daily payment amount by dividing the total cost by the number of days you’ll be making payments. Evaluate your budget to ensure that making daily payments aligns with your financial situation. Calculate how the daily payment will fit into your monthly expenses.
How Daily Interest is Calculated
Calculating daily interest for an item involves determining the daily cost of borrowing money, often expressed as an annual interest rate divided by 365 (for the number of days in a year). Here’s a step-by-step guide on how to calculate daily interest:
- First, you need to know the annual interest rate associated with the item. This could be a credit card APR, a loan interest rate, or any other form of interest.
Divide the annual interest rate by 365 (days in a year) to get the daily interest rate. If the annual rate is given as a percentage, convert it to a decimal by dividing it by 100 before dividing by 365.
Daily Interest Rate = (Annual Interest Rate / 365) or (Annual Interest Rate / 36500 if given as a percentage)
Multiply the daily interest rate by the amount you owe or have borrowed. This will give you the daily cost of borrowing that amount.
Daily Interest = Daily Interest Rate × Principal Amount
Here’s an example:
Let’s say you have a credit card with an annual interest rate of 18%, and you owe Ksh 10,000 on that card. To calculate the daily interest:
Convert the annual rate to a decimal: 18% / 100 = 0.18
Calculate the daily interest rate: 0.18 / 365 = (approximately)
Calculate the daily interest: 0.00049315 × Ksh 10,000 = 4.9315
So, the daily interest cost for your Ksh 10,000 balance is approximately Ksh 4.9315.
Remember that this is a simplified calculation and doesn’t take into account factors like compounding interest (interest on top of interest) that can occur with some loans and credit cards. For more accurate calculations, especially for loans with compounding interest, you might want to use financial calculators or software tools that can handle these complexities.
Calculate the Total Number of Payments
Multiply the loan term in years by 365 to get the total number of daily payments over the loan term.
For example, a Loan for 1 year will have a total of 365 payments.
The total payments should be equal to 18% of the Principal amount:
In our example Ksh. 4.9315 in 365 Payments will equal Ksh. 1800
Calculate Daily Payment
An appropriate amortization formula is used to calculate the daily payment, accounting for both principal and interest. The remaining balance is updated after each payment as the loan is paid off incrementally.
The Total Repayment for our example should be 11,800
This divided into 365 total payments will be Ksh. 32.32
The borrower makes the calculated payment every day. The proportion of the payment allocated to interest decreases over time, while the proportion allocated to reducing the principal increases.
Tips and Recommendations
Loan servicers handle administrative aspects, sending statements with payment details, remaining balances, and other relevant information. Regularly review the amortization schedule to track progress and understand the effect of additional payments or changes in interest rates. Ensure Consistent daily payments are crucial to ensure the loan is repaid according to the amortization schedule.
With daily payments, automation becomes even more important to ensure payments are made accurately and on time. Setting up automatic transfers can help prevent missed payments.
Given the high frequency of payments, daily financed payments may not be practical for all types of loans or borrowers. They could be more suited for short-term loans or loans with specific repayment needs.
Research Your Options
Start by exploring items or services that offer daily payment plans. These might include rent-to-own stores, subscription services, or other installment payment options. As with any loan setup, actual processes and regulations can vary depending on the lender, the type of loan.