Tues. 12/06/26 12:20 EDT
.post #184
[url=Question about Compound Interest and Debt]
I think this is wrong. You don’t pay interest on interest “already paid,” but rather, you pay interest on interest not already paid.
I can think of one way in which one would pay interest on interest on a loan: A loan on which interest was calculated more frequently than interest payments on the loan were made.
Very simple example:
You borrow $1000.00, to be paid back (including interest owing) at the end of 12 months, in one “lump” payment. Interest on the loan is calculated once every six months, i.e., two times over the period of the loan. Let’s say the six-month interest rate is 1%.
So at the end of the first six months, you owe $1000.00 plus six months’ interest. That’s $1000.00 plus $10.00, i.e., $1010.00. Now, if you paid the bank the $10.00 interest for the first six months, you’d still owe $1000.00 plus interest (another $10.00) for the next six months. At the end of one year, you would owe have paid the bank $1020.00.
But since you don’t pay the interest, you now owe $1010.00 plus interest for the second six months.
At the end of the second six months, you owe $1010.00 plus interest, i.e., $1010.00 plus $10.10, i.e. $1020.10. The extra $0.10 is the interest on the first six months’ interest.
Edited twice to improve clarity.