The implicit interest rate is the nominal interest rate implied by borrowing a certain amount of money and repaying a different amount in the future. For example, if you borrow IDR 1,000,000 from a relative and promise to return it for an additional IDR 250,000 in 5 years, you will pay the implicit interest rate. Implicit interest rates are often found in everyday transactions.
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Method 1 of 3: Calculating the Implicit Interest Rate Manually
Step 1. Define the implicit interest rate
If you borrow money from someone and promise to repay the debt for an additional amount, no interest or interest rates are set. Let's use the previous example, you borrowed IDR 1,000,000 and it was returned in 5 years with an additional IDR 250,000. To find the “implicit” or “implied” interest rate in this agreement, you will need a mathematical calculation.
The formula that will be used is the total amount paid/amount of money borrowed and raised to the power of 1/ number of periods = x. So, x-1 x 100 = implicit interest rate
Step 2. Calculate the amount of the implicit interest
From the previous example, first divide the total amount paid by the loan amount, which is IDR 1,250,000 / IDR 1,000,000 the result is 1.25.
Step 3. Determine the loan term
Raise the result of step 1 by 1/n (n is the number of interest payment periods). For simplicity, let's use n=5 years to calculate the annual implicit interest rate. Thus, 1.25^(1/5) = 1.25^0, 2 = 1.0456.
Step 4. Calculate the percentage of the implicit interest rate
Subtract the above result by 1. Thus, 1.0456-1 = 0.0456. Then, multiply the result by 100 (0.0456 x 100 = implicit interest rate per year 4.56%).
Method 2 of 3: Calculating the Implicit Interest Rate with a Spreadsheet
Step 1. Gather the information needed to construct the implicit interest rate formula on the worksheet
The information required includes the number of periods (eg in months), the total loan amount, monthly payments, and the total loan period. All this information can be found in the debt agreement.
Step 2. Open the worksheet on the computer to calculate the implicit interest
Workpaper programs that are usually used are Microsoft Excel or iWork Numbers. You will enter the data from Step 1 into the formula bar on your worksheet.
Step 3. Click cell A1 and then click the formula bar above the column name
Say you borrowed a $3,000 property mortgage with $20,000 monthly payments for 30 years. Enter this formula into the formula bar: =RATE(30*12, -20000000.3000000000). Then, hit return.
The calculation yields a value of 0.59% which is the monthly interest rate. To convert this to an annual interest rate, multiply by 12 (months) and you get an implicit annual interest rate of 7.0203%
Method 3 of 3: Using Implicit Flowers
Step 1. Determine the Implicit Interest for Leasing
Often business owners prefer to rent business equipment instead of buying it. Usually, if the implicit interest is not stated in writing, the cost of the loan is calculated by the financial company making the loan.
For example, a company that produces food rents a pasteurization machine. If the rental fee is Rp. 1,000,000 and the company pays 12 times of Rp. 100,000 per month, the implicit interest in the lease agreement is 20%
Step 2. Determine the implicit interest on bond purchases
When buying bonds, the implicit interest that applies is the difference in the current yield (dividends) paid on
For example, you buy a bond with a dividend of $5 per share paid out in one year. As prices fluctuate in the market, you receive IDR 10,000 per share at maturity. Thus, the implicit interest is 5,000/10,000 = 50%
Step 3. Calculate the implicit interest before borrowing or renting
If the implicit interest is not stated, calculate the agreement's implicit interest before making a loan or lease. The implicit interest rate determines the total cost to be paid. Don't rely solely on monthly payment amounts or short-term bond yields to make financial decisions.
