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Why compounding interest is so powerful and scary

Read a posting made on Tan Kin Lian & Associates website. May I suggest a different title “The fearsome power of compounding interest and how you should not land on the wrong side“. Embellishments comes from me.

Calculating the interest rate on a short term loan

Dear Mr. Tan
This illegal loan was reported in the newspaper and I am wondering what is the effective annual interest rate in the case. I am sure it is not 20%.

“If you want to borrow $1,000, we will give you $800 and you return the sum over five weeks, $200 each time,”>Just curious, is there a excel function that can solve this problem?

REPLY
The excel function is RATE. Calculation is shown below. The effective interest rate is 7.9% per week, or 5100% p.a. compounded.

 

The best way for individuals to manage personal finance is to have positive cash flow. One must never end up in a situation where interest on debt is compounded until principal can no longer be repaid.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. ― Albert Einstein

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