Interest is only exciting if you are on the receiving end and making "bocoos" of interest income.
Interest is involving if you are borrowing money through a mortgage or on a credit card or in a loan from some source.
Interest is illuminating If you are a mathematician and enjoy the process of math and all its formulas.
Otherwise, most of us would prefer not to have to deal with it. Computers have made the job for those who must deal with interest regularly immeasurably easier.
Banks used to figure interest based on four months (before computers) and bank folks worked late into the night to figure out a quarter of the going interest rate on your account. My friend and banker, who ran several small banks, said that this was the much hated quarterly "interest" day when his employees worked overtime to correct everyone's balance. He said if someone was going to give up on being in banking, the resignations would come that week.
Computers compound interest almost continually so that bank balances grow continuously and resignations are based on other factors like salary.
Dislike a bank employee and want to cause a sessation of employment? Ask for a detailed compounding of interest on the loan itemized on a daily basis with a true total. That should simulate some of "interest days" hardships and cause pause for reflection about career choices.
Compound interest is paid on PRINCIPAL (that's what is borrowed) and on interest already earned (reinvestment of interest) which creates more wealth.
SAY WHAT???????????
Well , take $1000. and loan it to a friend (a GOOD and TRUSTWORTHY friend) at 10% interest for a year (this is not a charity event!!!!!!!!!!) and when that friend repays you, the amount he pays is $1100.
Now another friend wants to use the $1000. but encourage him to take $1100. (it's burning a hole in the pocket) and charge him 10% interest for a year . When (and if) he repays the loan, $1210. will be the amount. $210. has been made on the $1000. over two years and a compounding interest of two very close friends.
In other words, using the interest paid on the money increased the amount of money loaned and the amount repaid. You COMPOUNDED INTEREST. They have formulas for this. I will not bore you with them.
There is one interesting math formula for the lender AND borrower . If you want to know how long it will take to DOUBLE your loan money by ANNUALLY COMPOUNDING the interest :
DIVIDE THE INTEREST RATE INTO 72 (72 divided by 10=7.2 years)
This works when the interest rate is less than around 20% and is pretty true to fact if not completely accurate to the gnat's eyebrow!!!!!!!!!
If a lender for some reason wants to double money in eight years and wants to know what interest to charge:
DIVIDE THE YEARS INTO 72 (72 divided by 8=9%) NOW THAT'S FUN!!!!!!!!
There are many tricks in math and shortcuts. And for the life of me I do not understand why these are not provided in grade school beginning math classes. Kids love to learn by having fun! Obviously, we only want our mathematicians to have it easy not the math challenged folk.
The RULE OF of 72 was written down by an Italian mathematician in 1494. Those 1400's were really brilliant years for the Italians in a number of fields including math and art. No mathematician seems articulate enough to tell us verbally why this RULE OF 72 works--only give formulas. Again just accept that it works and is close enough for your purposes.
Borrowers who pay interest on charge accounts are involved in interest constantly and need to understand what the amount that is being charged actually means. In many cases the interest on money when one elects to simply make a payent is COMPOUNDED. If the card information says: "COMPOUNDED DAILY", the Credit company is charging interest every day, they add this interest to your previous balance every day then round it off.
Let's say the balance is $1000. and 23.73 interest rate (high but not unusual) $1000. x 0.0006501=.65
(They use formulas- this is one: 23.73%/365 = 0.06501% or 0.06501% or 0.0006501 when % means 100)
Sixty-five cents is added to your balance so on day ONE, you owe $1000.65; on day TWO, another .65 will be added so by day THREE, you owe $1001.30; on day FOUR, .66 is added and your balance becomes $1001.96. The COMPOUND INTEREST by day FIVE makes your total $1002.92 AND ON IT GOES through THE REST OF THE MONTH!!!!!!!!!!!
So by paying interest on interest (COMPOUNDING) the total is going up daily and the monthly payment may be too small to reduce the balance much if at all.
The other method of computing interest is: "AVERAGE DAILY BALANCE" which has a more complicated method: AT A CERTAIN TIME EACH DAY RECORD BALANCE. AVERAGE,THEN DIVIDE BY NUMBER OF DAYS TO ACQUIRE MONTH'S BALANCE, THEN MULTIPLY BY MONTHLY INTEREST RATE. (daily rate x NUMBER days).
Trust me it compounds. How do you think they stay in business in good times and bad. As I have said in the past the interest rates charged on credit cards today were considered USURY.
Definition of USURY: THE ACT OF LENDING MONEY AT AN EXCESSIVE OR EXORBITANT OR ILLEGAL INTEREST RATE. The information with the bill gives that companies' formula for figuring interest which they know won't be read. Get the formulas, use the calculator!!!Prove them wrong.
However, remember they have to "eat" (lose money on the deadbeats) all the defaulted debtors.That higher cost allows the higher interest. Banks used not to loan money to people with bad credit records or an inability to pay back the money. Credit Card companies changed all that. A fee is collected from businesses to offset the defaults.
Of course, your best bet is to pay cash. As they used to say in the OLD days: neither a borrower or a lender be. However, in 2010 that has become an OLD SAYING and all that goes with that feeling. So your next best bet is to pay the balance monthly in full. What can I say? There really isn't a next best bet.
Although our math trick doesn't really work on over 20% (and don't think they didn't think of that!) we can ASS U ME that the company will double its money in about 2-3 years. Which means my friend those bargains wound up costing twice as much!!!!!!!!!
Cheers, Connie
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