Tilted Forum Project Discussion Community - View Single Post

NoSoup · 08-09-2006, 10:41 AM

Basically, providing that you are calculating the interest for that year based on the amount that he owes, even if the interest rate remains the same, you obviously won't earn as much in interest.

I calculate your initial rate to be approximately 9.2467%. At this rate, $10,000.00 would net you approximately $7,000 in interest.

However, if he were to make annual payments based on that same rate, it would now net you approximately $2937.00. His payment would be $2587.40 annually. However, keep in mind that if he pays you on a date other than the scheduled one, the figures that I have calculated will be off.

At any rate, to keep the amount of interest you earn the same if he is making annual payments, you would need to charge him 20.7615%

Obviously the decision is up to you, but in my personal opinion 9.25% is a bit low compared to the amount of risk I believe you'll be taking. Unless he is a good friend or has a very, very stable financial situation that wouldn't change if his business fails, you may want to potentially increase that rate. He would be hard pressed to find an unsecured business note for that low of a rate, so I don't think that it would be unfair to charge more.

At any rate, I'll remind you to get absolutely everything in writing, and make sure you give him reciepts for the payments. Also, don't accept cash unless it's absolutely necessary.

********************

Whoops, I just reread your post, and saw that it was simple interest. The above information is calculated using compound interest compounded annually.

So, you are correct that using simple interest 14% would net you $7,000 after five years. However, if he is going to be making annual payments, you will obviously net less.

APR is basically the total cost of the loan, once you include all fees associated with that loan - including any recording fees, interest, etc. The effective rate is the rate at which the interest will be calculated.

If you friend does in fact want to keep the rate the same, simply keep it at 14%, but remember to calculate the interest amount on the new amount owed at the beginning of each year.

Hope this helps - I left my confused ramblings up top just in case you wanted a bit more information about compounding interest
If you have any more questions, please let me know!

08-09-2006, 10:41 AM	#326 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	Basically, providing that you are calculating the interest for that year based on the amount that he owes, even if the interest rate remains the same, you obviously won't earn as much in interest. I calculate your initial rate to be approximately 9.2467%. At this rate, $10,000.00 would net you approximately $7,000 in interest. However, if he were to make annual payments based on that same rate, it would now net you approximately $2937.00. His payment would be $2587.40 annually. However, keep in mind that if he pays you on a date other than the scheduled one, the figures that I have calculated will be off. At any rate, to keep the amount of interest you earn the same if he is making annual payments, you would need to charge him 20.7615% Obviously the decision is up to you, but in my personal opinion 9.25% is a bit low compared to the amount of risk I believe you'll be taking. Unless he is a good friend or has a very, very stable financial situation that wouldn't change if his business fails, you may want to potentially increase that rate. He would be hard pressed to find an unsecured business note for that low of a rate, so I don't think that it would be unfair to charge more. At any rate, I'll remind you to get absolutely everything in writing, and make sure you give him reciepts for the payments. Also, don't accept cash unless it's absolutely necessary. ******************** Whoops, I just reread your post, and saw that it was simple interest. The above information is calculated using compound interest compounded annually. So, you are correct that using simple interest 14% would net you $7,000 after five years. However, if he is going to be making annual payments, you will obviously net less. APR is basically the total cost of the loan, once you include all fees associated with that loan - including any recording fees, interest, etc. The effective rate is the rate at which the interest will be calculated. If you friend does in fact want to keep the rate the same, simply keep it at 14%, but remember to calculate the interest amount on the new amount owed at the beginning of each year. Hope this helps - I left my confused ramblings up top just in case you wanted a bit more information about compounding interest If you have any more questions, please let me know! __________________ I have an aura of reliability and good judgement. Just in case you were wondering... Last edited by NoSoup; 08-09-2006 at 11:12 AM..