Author Topic: Interest rates are backward - should use APR  (Read 321 times)

meagher79

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Re: Interest rates are backward - should use APR
« on: June 03, 2020, 10:47:49 am »
I will include an example from the game.  Right now I could borrow $100,000 for one year at $2,277 for 52 weeks.  This would be $18,400 in total interest and a total repayment of $118,400.  This is all good so far.  The problem is that the game calls this an 18.4% "interest rate."  In fact, the interest rate on this loan is much higher than 18.4% because the principle is being paid off over time, but the amount of interest charged doesn't go down.  I would be paying interest on money I have already paid back.  I tried to match the terms of this loan using the loan calculator and it is actually 34% APR.  Look at the top option, "Amortized Loan", at the link.  https://www.calculator.net/loan-calculator.html?cloanamount=100000&cloanterm=1&cloantermmonth=0&cinterestrate=34&ccompound=weekly&cpayback=weekly&x=70&y=22#amortized-result

On the other hand the 5 year loan overestimates interest rates for reasons I explained above.  I can also borrow $100,000 for five years at $487 for 260 weeks.  The game calls this 26.% interest, but it actually works out to be about 9.8% interest.  Again see the link and look at the top loan option "Amortized Loan."  https://www.calculator.net/loan-calculator.html?cloanamount=100000&cloanterm=5&cloantermmonth=0&cinterestrate=9.8&ccompound=weekly&cpayback=weekly&x=34&y=18#amortized-result

Conclusion:
1yr loan = 34% APR
5yr loan = 9.8% APR
The rates listed in-game are misleading.  It's not that big of a deal because the actual repayment amounts are accurate.  I love this game, and I only hope to be helpful.