Leaflet through the letterbox - 739.9% APR

Yes, if it is simple interest.

So your method involves compound interest, compounded every two weeks. Why two weeks? Why not four-weekly? Yearly? Daily? Hourly?

I have noticed banks generally calculate overdraft interest by compounding daily. Why only daily?

It seems to me the equitable way to calculate compound interest is to compound it continuously, but I never see anyone doing this. Perhaps the maths is beyond them.

"Alec McKenzie" wrote

Let's get this straight. Someone borrows 100 for two weeks and pays back 125 at the end of the two weeks. If he then effectively "immediately re-borrows" that 125 for a further

2 weeks (so four weeks in total), then he pays back 150 at the end of the extra two weeks.

Now, seeing as you only charge 25 for borrowing 125 for two weeks, then why on earth did the borrower only take 100 the first time? He should have borrowed 125, and he'd still only pay 25 in interest over the two weeks...

"Alec McKenzie" wrote

There's nothing special about two weeks, and the compound interest would be no different if it had been specified per week, day or hour.

"Alec McKenzie" wrote

How would you compound the interest over four weeks or a year, if the loan had been paid off after only two weeks? :-(

"Alec McKenzie" wrote

Yes, you could just as easily say it is "just over 11.8% per week, compounded weekly". Or: "just over 1.6% per day, compounded daily". Or: "just under 0.07% per hour, compounded hourly".

Get the picture?

"Alec McKenzie" wrote

Because they only keep track of the balance on the account at the end of each day. They don't store the balance at the end of each hour or minute!

"Alec McKenzie" wrote

If something only changes daily, never hourly or every minute/second, then compounding the interest daily or hourly (or even each minute or second) gives exactly the same answer.

"Alec McKenzie" wrote

I'm sure they will have access to scientific calculators with a log function!

I think you'll find Tim *is* compounding continuously. But to be able to do that, you need a frame of reference, and in this case it is provided by the 25% relating to a fortnight. To convert that frame of reference to a week, say, would imply changing the rate to some 11.8% (not 12.5%), or to convert it to 4 weeks the rate changes to 56.25% (not 50%).

The best way, IMO, is to specify an annualised rate of compounding, and to apply it every time there is a non-interest transaction on the account, on the basis of how many fractions of a year have elapsed since the last application.

Everybody step *away* from the keyboard and drop the interest rate (to

0%, then the maths are a bit simpler ;-)

Andrew McP