What is ADD ON Interest compared to apr? To understand add on interest correctly one should set there mind to a previous era. Before the glamour of computers, pocket pcs and 4.00 a gallon gasoline. Go back to the 1920s before the goverment decided who was a loan shark and who was a legal lender. In those days there was no way to figure a amoritization by hand unless you had a great since of math. If a farmer went to the bank in these days and said "I need to borrow 1,000.00 will you help me?" . The banker probably would respond with well "We will loan you 1,000.00 Mr Farmer and you will repay us 1,200.00 over the next 12 months." There was no amortization print out or daily simple interest it was simply put you owe me 1,200.00 over the next 12 months bring me the agreed and were all happy. This creates alot of questions in those days thru the 40s. Exactly what was the interest charged the goverment would definetly step in and decide this delima and they did. 1000 * 12 Months * 20% does = 200.00 and 20 apr if I borrowed it the first day of january and rapid it the first day of january next year in a single payment.But not 20 apr if I pay monthly on the loan. This also brings up the fact that Mr Farmer Paid 100.00 per month for 12 months what was his pay off after 6 months. Well in the 1920s they did not have college grade calculators so they devised Rule of 78s. Re 1+2+3+4....+12 = 78 Each payment is paid in a factor 12/78 * 200 = interest of first payment. No calculator needed. (12/78 + 11/78 + 10/78 + 9/78 + 8/78 + 7/78) * 200.00 = interest paid for first six months of a 1920s loan. Believe it or not this practice is only outlawed in about half our states so far to date. This method of figuring interest with out a calculator existed so anyone with basic math could figure out a pay off on a loan. Now lets not just Call Add On a Bad method. It was rule of 78s that caused terrible delimas in modern society. If i want to loan 1000.00 and add on 20% for a 1 year loan. I can do so in many states legally. I must simply figure out the annual percentage rate. I also must disclose it in the Truth and Lending Box of the contract in any state. That is for another article however :) Hope this was some insightful reading. Clm Dev Team |
