The math is self explanatory. With amortization the profit is a straight %interest rate per month. The payment schedule clearly shows this. There is not more profit at any time during the loan except those that may be associated with closing costs (and that is not the subject here). I supplied the opposing payment schedules clearly demonstrating this. QED. Please come up with a proof for your claims. Repeating statements unsupported by the numbers does not work. You are arguing 2 + 2 = 5. And given that you have the facts, please accept responsibility should you find yourself in trouble with one of these simple interest loans.
I think education here is a good thing here. Otherwise the misinformed masses will create another real estate mortgage bubble . Let's take a few months to analyze. What is the profit/ROI of these:
1. 10,000 at 10% annual interest for 1 month (The interest rate for the month is simplied to .1/12) =
2. $9,204.17 at 10% annual interest for 1 month =
3. $8,401.71 at 10% annual interest for 1 month =
12.$871.88 at 10% annual interest for 1 month =
Which one has a higher ROI or profit? (anyone can answer). Why?
Let's mix it up:
6. If I made $63.27 on $7,592.57 in a month what was my annual rate of return?
8. If I made $35.73 on $4,287.99 in a month what was my annual rate of return?
If you add up the interest paid in months 1-3 in the amortized loan, the sum is $230.04
If you add up the interest paid in months 1-3 in the simple interest loan, the sum is $137.49
According to every math class I have ever taken, $230.04 > $137.49
Under an amortized loan, the lender has received a greater percentage of their profit in the first 3 months of the term than the lender would have received in a comparable simple interest loan. QED
PrintSmith wrote: Let's look at those two tables daisy.
If you add up the interest paid in months 1-3 in the amortized loan, the sum is $230.04
If you add up the interest paid in months 1-3 in the simple interest loan, the sum is $137.49
According to every math class I have ever taken, $230.04 > $137.49
Under an amortized loan, the lender has received a greater percentage of their profit in the first 3 months of the term than the lender would have received in a comparable simple interest loan. QED
Please consider the contract. A 10 percent rate of return - ie. interest rate of 10%. You fail to meet that criteria in the $137.49. That means you still owe the investor $230.04 - 137.49 plus the compounded 10% interest on the difference. (I assumed your numbers are correct). It is easy to have the lender make less when you lower the interest rate of the loan for the time period under consideration.
The presumption is that both contracts will be honored according to their terms. In both instances the lender will receive the same amount of profit by the end of the term, the difference is how quickly he will gain control that profit for his own use. If both loans are paid according to the terms of the contract, the amortized loan will have paid $230 in profit at the end of the second month while the simple interest loan will have only paid $137 in profit and he would have nearly $100 more in his pocket to put back to work for him. With a simple interest loan, he would be waiting an additional 60 days to have control of the same amount of his profit, which is 60 days of lost potential to make additional profit by reinvesting the $230.
I had not mentioned the loss use of the $$ by the lender in the simple interest loan for simplicity sake. Technically the rates of return are not the same due to the lenders loss of use in your scheme. Since for any time period there is an established time value of $$ - I suspect the simple interest payment schedule will have a correspondingly higher interest rate in relation to the amortized plan. However, the point remains that should the simple interest loan need to be paid off early - and most loans are - the borrower will need to make up the difference between the two payment schedules in order for the lender to make the agreed upon 10% rate. For a $100,000 30 year loan - that is a sizable chunk. And the equity that the borrower thought they had was merely a mirage, a selling technique, and the basis for another real estate mortgage bubble when the amount due is less than the equity they have in their house. Of course this will not be come apparent for 5-10 years after selling these loans - and from the buyer's perspective - who cares - I can walk away if I do not have the money to close the loan. And from the lenders' perspective - who cares, I make my money closing/selling the loan and it is the government who loses. This is the hidden cost of this loan structure. False equity.
. Let's take a few months to analyze. What is the profit/ROI of these:
