In need of an Accountant's/ Mathematician's input. (pay, rate, credit)

[npumcrisz]

I signed a loan which states in writing to be based on Simple Interest but I doubt the validity of the loan agreement. It seems to me to be based on compound interest. Am trying to figure out if the document is fraudulent. There is no mention of daily percentage rate any where on the contract like it is found on credit card agreements / contracts. Hence I am not trying to figure out the daily percentage rate.


My question if you could kindly assist me is base on the following scenario


How do we know determine the difference between a compound interest loan and a simple interest loan if both must be paid at an APR of 10% with a term of 5 years and a principal of $20000.00

If I remember well the formula for SI is principal*rate%*time and that for
CI is principal*(1+rate%)raised to the power time.

After 1 year my balance is $22000 at the above rate with any of the above formula.
If I make an annual payment of $5000.0 since no daily percentage rate was provided my balance must be $17000.0 carried over into year 2 with either SI or CI formula.

Using CI formula my new balance is $17000.0 (1+0.1) which is $18700.0 carried over to year 3 without making any payments the second year. If I made a payment of $5000.0 in year 2 then my balance is $13700.0 carried over into year 3.

1. Now this is where I need help, what is my new balance with SI carried over into year 3 without me making any payments the second year?
2. What is my balance carried over into year 3 after making $5000.0 payment?

I know what my balance after 1 year is but I can't use this balance to compute the new interest because that would be based on the rules of compounding. This is why I am lost, correct me if I am wrong.

[GreenMachine]

Simple interest is usually on loans of a year or more. Most loans are compound interest, where the interest accumulates and you are more interest based on your interest, right? But if you are paying off the interest as you go along, what is the difference?

Greenie

[coldwine]

I read your prompt and what I saw as meaningful was: Adjustable. Prime. Rate.

I'd advise you to speak with an accountant iRL if this bothers you.

[mikeyyc]

Simple interest is based on a strict interest on the ORIGINAL balance.

Principle x rate x time = Amount

In your example its $20,000 x 0.1 x 5 = $10,000

To borrow $20K for five years at 10% means that at the end of five years you have to pay $30K. You get no benefits from early payment as the interest is not compounded. Your payment of $5K per year is nice, but has no effect on the amount of interest to be paid.

Compounded interest you need to know how often the interest is compounded eg daily, monthly, annually, and then you can calculate the amount over time. In compounding paying down the principle greatly reduces the amount of interest paid over time.

Simple interest is exactly that. You agreed to pay 50% to borrow the money for five years. If it was only for four, you would have paid 40% and so on.

Hope it helps.

Mike