Finbond’s 15.5% interest disputed

‘EFFECTIVE RATE’: TOTALLY NONSENSICAL CALCULATION

Retired actuary: terminology is ‘purposefully designed to mislead investors’.

investment, and continue to earn the same nominal amount every year for five years.

If, however, you reinvest that interest, you start seeing compounding. You will earn interest on your interest and therefore begin to see the nominal amount of interest grow each year. 11.5% per annum, compounded monthly in arrears, which yields an effective rate of 12.1%,” Bester argues. “They calculate the maturity value correctly, but they portray the 11.5% compound interest as if it is in fact effectively 15.5%.”

Finbond responds

Finbond chief executive Dr Willem van Aardt disagrees.

“Our advertisements for the interest-bearing note makes it abundantly clear that the rate is 11.5% calculated on a simple interest basis, and in the event that the client elects to have interest capitalised over the term of the product and paid out only upon maturity thereof, then the interest compounds monthly, which means it is added to the capital balance of the note, and the effective rate earned works out to just under 15.5% ...”

Van Aardt didn’t explain why, if Finbond acknowledged the 11.5% rate is the actual interest rate, the 15.5% is advertised at all.

He also didn’t explain why Finbond uses this kind of calculation when other banks have been criticised for similar practices.