Why are cumulative interest payment calculations different?

[Guest]

I get very different answers when using
CUMIPMT(rate,nper,pv,start_period,end_period,type) and an equation I've seen
others use to calculate cumulative interest paid (=(annual rate*present
value)/12) * number of months held).

Can someone explain why these equations produce different results? I need
to ensure I'm using the correct calculation.

 

[Guest]

If I understand your question...
The CUMIPMT function gives total interest paid on a loan over a given time
period, let's say 12 months. In month 2 and forward, the balance on which
the interest is calculated is now lower(after amortization), than the
original amount, or pv.

In the second formula you are using, the pv (I'm assuming you mean original
balance or 1st balance) does not change, so this will give you total interest
paid if there was no principal being paid (no amortization) on the loan.
This amount will be significantly higher than the first formula.

hth,
Dave

 

[Guest]

Thanks Dave. That's just what I needed to know.

Greg