Calculating Interest

August 8, 2009 4:58 PM

How do I calculate interest on a short term loan?

I am borrowing $2,300.00 from a friend for car repair. I have promised to begin paying him off $300.00 a week beginning Sunday, August 16. I told him I would give him 5 %. This will be paid off in 8 weeks. How do I calculate the interest?

posted by goalyeehah to work & money (8 comments total)

5% of $2,300 is $115, so you'll payback $2,415 in total. In 8 weeks, you'll still owe $15.
posted by Obscure Reference at 5:05 PM on August 8, 2009

For casual loans like this the de facto method is simply to add whatever you say is interest to the principal at the start, then pay that amount off. So $2300 becomes $2415. That gives 7 payments of $300 and one of $315.

The reason for this is that without any other qualifiers, it would commonly be assumed you'll pay 5% of the principal regardless of term. If, however, you said you'd pay an annualized rate of 5%, that'd be a totally different kettle of fish (and, in fact, you'd be paying rather less).
posted by wackybrit at 5:06 PM on August 8, 2009 [1 favorite]

Whoa...assuming you've promised 5% for the 8 week loan, this is a very expensive way to borrow money. It translates roughly to an annual rate of 30%. Even the worst credit cards have a lower APR, and then you typically have your 3-week interest-free grace period from the end of the billing cycle. Do you not have any other options?
posted by randomstriker at 5:37 PM on August 8, 2009

5% as an annualised rate over eight weeks on the whole amount would be:
((2300*5%)/365)*56)= $17.64

I am guessing this is probably not what you meant when you said you'd pay 5%. But maybe you have a good friend.

If you did mean an annualised rate, and calculated interest weekly to coincide with your payments, it would look like this over the 8 weeks (cents rounded to two places):
Week 1 (Aug 16): pay $300, remaining balance including interest for last 7 days = $2002.21
Week 2: pay $300, remaining balance = $1704.13
Week 3: pay $300, remaining balance = $1405.76
Week 4: pay $300, remaining balance = $1107.11
Week 5: pay $300, remaining balance = $808.17
Week 6: pay $300, remaining balance = $508.94
Week 7: pay $300, remaining balance = $209.43
Week 8: pay $209.43, remaining balance is $0.
Total interest paid when calculated weekly = $9.43

I think your friend is probably expecting $115.
posted by AnnaRat at 6:17 PM on August 8, 2009

Oops, there is another 20 cents of interest that should be paid in week 8, so that is a final payment in Week 8 of $209.63 and a total interest bill of $9.63.
posted by AnnaRat at 6:23 PM on August 8, 2009

When talking of interest rates wouldn't most people think of rates based on an annual period?
posted by canoehead at 7:00 PM on August 8, 2009

If he hasn't already given you the money, write out a contract even if it's just an IOU that spells out how much you will pay and when.

I've loaned to friends I knew to be good for it at 5 and 10% per year, but your friend is probably expecting 5% of the total. It's best to make sure that everyone's on the same page up front.
posted by a robot made out of meat at 7:03 PM on August 8, 2009

When talking of interest rates wouldn't most people think of rates based on an annual period?

If looking at numbers from a bank or credit card, sure. When someone says "Lend me $500 and I'll give you 10% interest when I pay it back" it tends to mean they'll pay you back $550 and the payment "terms" are mostly negotiated separately - at least, I've never been in a social situation where anyone assumed banking terms.
posted by wackybrit at 8:40 PM on August 8, 2009