Expert: David Hemmer - 12/28/2010

Question
I got myself involved in a loan with a national company that for a $2600 loan,they charge 96% interest over 42 months. Yes, I know. I have 12 months left to pay, but they show my payoff amount as higher than my balance. This makes no sense to me. I believe that the payoff should be lower. This is from the loan document: "Interest is calculated on a 360/360 simple interest basis. This means that interest is calculated by dividing the annual Interest Rate by 360, multiplying that number by the outstanding principal balance, and multiplying that number by the number of days the principal balance is outstanding." I do not understand this equation. Any help would be most appreciated. Rick

Answer
Simple interest is just as it describes, you are paying interest each day, assuming each year has 360 days. Suppose for example your annual rate was 36%. This means your daily rate is 0.1%. Suppose the loan was  $100. The first day's interest would be $100*.001=$0.1.

Thus after 1 day your balance would be $100.10. Now the interest for the second day would be higher because your balance due is higher.

If you do this for 1 year you will find you owe:

(100)*(1.001)^360

This will be higher than $136, i.e. your annual percentage rate is higher than 36%.

Now if the payoff amount is the total amount of your remaining payments it could certainly be higher than the outstanding balance, for example in a typical mortgage the total interest payments are often more than the total loan amount. But usually you are allowed to just payoff the loan at any time by paying the remaining principal, it doesn't sound like this is the case for your loan.

If this doean't make sense you can send me the loan document to look over.

Dave