inh12
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| Simple Interest question |
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I have someone who wants me to loan him money, ($20,000 at 5% simple interest, and he wanted to pay me back $500 per month) so I went to an online loan calculator and figured out a standard payment schedule. However, when I gave him the schedule, he then came back and said "no, this isn't correct. I want it to be simple interest". He then took the $20,000 and multiplied it by .05 to come up with $1,000 total interest to pay off the loan, so he said it would only take 42 months to pay it off instead of the 44 months that I calculated (and he would end up paying roughly $930 less dollars in interest).
I know you can really create a loan any way you want, but my question is does anyone agree that his loan plan is really Simple Interest? In my mind, he is only wanting to be charged the interest rate on the initial principal, and not over the time of the loan. Am I wrong?
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Tue Jan 31, 2006 5:48 pm |
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Andrew
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You gave them a compound interest payment schedule.
They want a simple interest loan. They repayment schedule can vary: 42 month (40 + 2), 40 months (interest divided over repayment schedule), etc.
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Tue Jan 31, 2006 6:02 pm |
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inh12
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From what I can tell by looking around at various Simple Interest formulas, Simple Interest is usually calculated as: Simple Interest = (Principal x Rate x Time)
IMO, the way he calculated it was just: Simple Interest = (Principal x Rate)
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Tue Jan 31, 2006 8:05 pm |
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Andrew
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Sorry, that's right. I forgot about T, just like your borrower. 
Sounds like you've got it figured out. But you can tell your borrower that since they want to borrow for roughly 3 years the interest would be ~$3000. T = 3.
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Tue Jan 31, 2006 9:48 pm |
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efflandt
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Your friend is asking for 5% TOTAL interest for 42 months, which amounts to 1.43% APY which would be even lower than that as APR compounded monthly. Do you have another $20k to loan me at that interest rate?
You could do better paying the tax on interest from a high interest savings account or CD. And what assurance do you have that that your friend will pay you back as scheduled?
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Wed Feb 01, 2006 3:34 am |
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No-Brainer
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| The only fair way |
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If you want to be fair on both sides, keep a record of each payment including the APR divided by 365 for daily interest times the number of days since the last payment to calculate the new balance.
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Wed Feb 01, 2006 5:34 am |
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Rolo
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quote:
Originally posted by efflandt
Do you have another $20k to loan me at that interest rate?
Ditto! I'll even pay 6% at that simple rate! 
You better check your local laws on this; consult a lawyer. True story:
Person A lends Person B some money by borrowing against her credit card at 18% interest. The agreement is that Person B repays the money plus the 18% interest charged by the credit card to borrow it.
Person B does not want to finish repaying the loan; they go to court. The wonderful state of California decrees that one person cannot charge another person more than 10%, therefore Person B is only required to pay 10% interest. Person A loses 8% plus court costs for helping a friend.
The LOVE of money is the root of evil.
"Expect me when you see me."
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Thu Feb 02, 2006 1:24 am |
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MattL
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If you want to stay friends don't loan the money!!
Debt Elimination
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Thu Feb 02, 2006 9:33 pm |
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