Re: Loan accounts

At 8/31/2011 09:00 PM +0100, John Sampson wrote:
>Please excuse a possibly clueless question, but why is interest not included
>in the balance shown in a loan account? Should it appear elsewhere for
>the sake of calculating one's total worth?

Both the views already posted are useful. Here are several others.

"Balance" is the current value. Interest is an *ongoing* expense of 
having the loan. If you were to pay off the loan today, you would 
only have to pay the loan balance (plus a few days interest, but I 
don't think that's what concerns you).

The future interest is not something you owe in total no matter what 
else happens. It's based on the future balance of the loan.

There are cases (rare now AFAIK) of loans with prepayment penalties, 
which are essentially an obligation to pay at least part of the 
interest. Even in these cases, if you had the money to pay off the 
loan and the only problem were the penalty, you could place your 
money in an interest-bearing account and mostly balance the interest 
paid with interest received. (Won't work very well at the moment, but 
in general that's the case.) So it might be reasonable to include 
part of the future prepayment penalty in your net worth -- except 
that if you pay the loan on schedule, you won't pay the penalty.

Your net worth is also not adjusted for your future income. That's 
because you have no guarantee of future income, just as there's no 
absolute obligation to pay interest on the loan. Of course there *is* 
an obligation to pay the loan balance, which is why it's included in 
your net worth. The future value of the property (if the loan is a 
mortgage) is also not included, and would not be included even if it 
could be predicted accurately, because net worth is a report on your 
present state, and also you might sell the property and then not 
receive the future value. (Any guarantee of future value would 
normally be represented in the current value, as for example happens 
with bonds.)

It sounds like you are interested in a projection of your future net 
worth, as are a lot of people. This of course is a complex matter. A 
lot of people would like a better handle on this. There's a Balance 
Predictor extension for MD, but it only works on a single account, 
and works best when the transactions on the account are either nearly 
the same from month to month, or are all represented in reminders. 
That's useful but doesn't help much with future net worth.

Edward 

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