Let's talk Interest

[BassBoy]

IMHO, I think this is a great question and I would just love to know where this (garbage) is written…………Rule of 78?

Let’s set aside for the moment our claims of how money is created. My opinions here are what to do about the interest to principle ratio in the loan payments. Let’s say, I take a $120K loan to buy a home and I am to pay 6% interest and make 360 monthly payments. My principle and interest payment is $719.46/month. However, looking at how the Rule of 78 amortizes it, I would pay $7159.61 in interest and $1473.61 in principle for the first year of the loan. Year 2 would be $7069.02 in interest and $1564.50 in principle, and so on and so forth. Well, I’m barely paying down the principle balance in the early years of the loan. This doesn’t make any sense, nor is it fair.

Allow me to explain……….

A $120K loan would end up costing me a total of $259,005.60 after 360 payments; so, my interest paid is $135,005.60. Well, it seems logical that the interest would be divided by 360 (months) and so would the principle. This is basic, elementary math people. So, the way I see it is this……..

Total interest of $135,005.60 divided by 360 = $386.13 ($4633.56 each year and never changes).
-And-
Total principle of $120,000.00 divided by 360 = $334.34 ($4333.32 each year and never changes).

My monthly payment is still the same, but the interest and principle have been equally divided over 360 payments. Makes sense, right? So why is it that in those early years of the loan, each montly payment is barely 1.2% of the principle balance being paid and 6% of the interest being paid? Again, the payment is still the same, but the interest and principle have been made equal each month and each year. This is simple math.

So, my question is, how do you beat this rip-off?!?!?!?! Where is it written that the lenders MUST charge more interest early on and squat is being applied towards the principle? This makes absolutely no sense and is incomprehensible and I would like to know how to beat this wierd formula called Rule of 78.

Another rip-off that really pisses me off is these Home Depot store card, Lowe’s store card, Sears and whoever else that offer 12 months Same-As-Cash. I recently got one of these and bought some things with their great offer. Well, when I received my first bill, the minimum payment due, times 12 months, was not enough to pay off the balance in 12 months, thus, having a remaining balance after the 12 months and then getting slammed with the incurred interest charges. It’s bull@#*! I tell ya.

[dashboy]

Bassboy,

This is called Simple interest and Compounded interest. It is exactly what we were not taught in public school or college. They do not want you to understand this. They hide the true facts of it from the public! To get a really Good grasp of it, they send bankers to specific banking schools to learn it and how to apply it. It is legalized theft of others assets and energy.


Here is a quick explaination.

Interest is articulated as a rate, such as 1%, 3%, or 18%, 21%, ECT....
The dollar total of the interest you earn on a savings account is figured by multiplying the money you deposit (called the principal) by the rate of interest. If you have $100 in an account that pays only 1% interest, you'll only earn $1 in interest. This is basic simple math that anyone with half a brain can understand!

So when you put money in a savings or an interest bearing checking account, the bank pays you interest according to what you deposit. In effect, the bank is paying you for the privilege of "borrowing" your money (FRN's) based upon a simple interest formula. Simple interest is figured once. Here is an example: If you loaned $300 to a friend for one month and charged her 1% interest ($3) at the end of the month, you'd be dealing with simple interest.

But this is not true for the interest you pay on a loan you take from the bank or the money credit you "borrow" from a credit card. In banking, interest is calculated and added at the end of a certain time period. You might have a savings account that offers a 3% interest rate annually. At the end of each year, the bank multiplies the principal (the amount in the account) by the interest rate of 3% to compute what you have earned in interest. They bank usually figures this with the lowest balance you ever had at any one time during that year! So if you started the account with say a $1000.00 but over the period of that year the balance fluxed from that $1000.00 down to $500.00 and then back up to say $1000.00, the bank could figure the interest due to you using the lowest amount of $500.00 rather than the highest amount for that year. Hope that makes sense!


But here is the real kicker!!
With compound interest, the money the bank earns in interest becomes part of the principal, and earns interest as part of the principal. Example: If you loaned that same friend $300 for one month but charged her 1% each day until the end of the month, you'd be using compound interest. At the end of the first day, she would owe you $303. At the end of the second day, she would owe you $306.03. At the end of the third day, she would owe you $309.09, and so on. Just keep multiplying the 1% and adding it to the pricipal each day for thirty days to get what she would owe in thirty days!


With that in mind, now think of that $1,000,000.00 dollar home you fork out on at 6% interest! Now think of that 21% credit card with compounded daily interest! Can you see the theft on top of theft?
Compound interest is what makes credit cards and loans almost impossible to pay off. Ever wonder why you NEVER see a bank offering compounded interest for savings and other interest bearing accounts for the customers? They only offer simple interest for their customers!

So if we get this straight, the Principal is created. The Interest is not, yet they add the compound interest to the principal everyday, thus turning nothing into something everyday upon which you owe! This is why even if everyone in the U.S. tried to pay off their credit card and loan debts they could not! It is virtually impossible!

I bet you they never explained that to you in that credit card agreement or loan contract did they?

dashboy~

[Judge Roy Bean]

Originally Posted by BassBoy

IMHO, I think this is a great question and I would just love to know where this (garbage) is written…………Rule of 78?

Let’s set aside for the moment our claims of how money is created. My opinions here are what to do about the interest to principle ratio in the loan payments. Let’s say, I take a $120K loan to buy a home and I am to pay 6% interest and make 360 monthly payments. My principle and interest payment is $719.46/month. However, looking at how the Rule of 78 amortizes it, I would pay $7159.61 in interest and $1473.61 for the first year of the loan. Year 2 would be $7069.02 in interest and $1564.50 in principle, and so on and so forth. Well, I’m barely paying down the principle balance in the early years of the loan. This doesn’t make any sense, nor is it fair.

Nobody really said it needed to be "fair" when it comes to taking advantage of people. You've obviously done some calculations that many people are simply not willing to delve into.

Originally Posted by BassBoy

Allow me to explain……….

A $120K loan would end up costing me a total of $259,005.60 after 360 payments; so, my interest paid is $135,005.60. Well, it seems logical that the interest would be divided by 360 (months) and so would the principle. This is basic, elementary math people. So, the way I see it is this……..

You're applying a linear logic. Ammortization of loans is based on a monthly calculation as if the loan were "new" every month.

Originally Posted by BassBoy

Total interest of $135,005.60 divided by 360 = $386.13 ($4633.56 each year and never changes).
-And-
Total principle of $120,000.00 divided by 360 = $334.34 ($4333.32 each year and never changes).

My monthly payment is still the same, but the interest and principle have been equally divided over 360 payments. Makes sense, right? So why is it that in those early years of the loan, each montly payment is barely 1.2% of the principle balance being paid and 6% of the interest being paid? Again, the payment is still the same, but the interest and principle have been made equal each month and each year. This is simple math.

Again, not so simple - it is constituted as if a new loan were being calculated every month.

Originally Posted by BassBoy

So, my question is, how do you beat this rip-off?!?!?!?! Where is it written that the lenders MUST charge more interest early on and squat is being applied towards the principle? This makes absolutely no sense and is incomprehensible and I would like to know how to beat this wierd formula called Rule of 78.

You can't beat it unless you turn the entire economic system for investors in lending upside down. The investors who fund (i.e., buy debt instruments like bonds) are the ones who make lending possible. They have an anticipated return on their investment based on the loan terms. Without the almost rock-solid guarantees, they aren't going to put up their money and buy the bonds.

Originally Posted by BassBoy

Another rip-off that really pisses me off is these Home Depot store card, Lowe’s store card, Sears and whoever else that offer 12 months Same-As-Cash. I recently got one of these and bought some things with their great offer. Well, when I received my first bill, the minimum payment due, times 12 months, was not enough to pay off the balance in 12 months, thus, having a remaining balance after the 12 months and then getting slammed with the incurred interest charges. It’s bull@#*! I tell ya.

I can only say "caveat emptor."

But a very key point - very few, if any, secured loans (like mortgages) ever go to full term. Thus, the lending system has been geared to getting most of the investment back early on - hence the "standard" ammortization you're complaining about. The industry is tuned to recognize early payoffs; it's called "runoff" in the servicing biz. Obviously, a loan that's paid off early doesn't pay as much in interest as the bond buyer might have expected, hence the "rule of 78's" formula that is sometimes used to make sure there is at least some predictable base return on the investment.

When it comes to lending, you have to take the position of the guy who shows up at the state fair and is walking down the midway. Those other guys barking at you to play their game are making their living off of gettting you to throw that off-balance ball at the hoop that is way off dimension. Every once in a while some rube will walk off with the big stuffed animal, but that's only to keep more rubes coming by to take the chance.

[idknow]

Napolean was shown this math and (paraphrasing) said "this is the power to destroy" (if i recall correctly)
--

Originally Posted by dashboy

Bassboy,

This is called Simple interest and Compounded interest. It is exactly what we were not taught in public school or college. They do not want you to understand this. They hide the true facts of it from the public! To get a really Good grasp of it, they send bankers to specific banking schools to learn it and how to apply it. It is legalized theft of others assets and energy.


Here is a quick explaination.

Interest is articulated as a rate, such as 1%, 3%, or 18%, 21%, ECT....
The dollar total of the interest you earn on a savings account is figured by multiplying the money you deposit (called the principal) by the rate of interest. If you have $100 in an account that pays only 1% interest, you'll only earn $1 in interest. This is basic simple math that anyone with half a brain can understand!

So when you put money in a savings or an interest bearing checking account, the bank pays you interest according to what you deposit. In effect, the bank is paying you for the privilege of "borrowing" your money (FRN's) based upon a simple interest formula. Simple interest is figured once. Here is an example: If you loaned $300 to a friend for one month and charged her 1% interest ($3) at the end of the month, you'd be dealing with simple interest.

But this is not true for the interest you pay on a loan you take from the bank or the money credit you "borrow" from a credit card. In banking, interest is calculated and added at the end of a certain time period. You might have a savings account that offers a 3% interest rate annually. At the end of each year, the bank multiplies the principal (the amount in the account) by the interest rate of 3% to compute what you have earned in interest. They bank usually figures this with the lowest balance you ever had at any one time during that year! So if you started the account with say a $1000.00 but over the period of that year the balance fluxed from that $1000.00 down to $500.00 and then back up to say $1000.00, the bank could figure the interest due to you using the lowest amount of $500.00 rather than the highest amount for that year. Hope that makes sense!


But here is the real kicker!!
With compound interest, the money the bank earns in interest becomes part of the principal, and earns interest as part of the principal. Example: If you loaned that same friend $300 for one month but charged her 1% each day until the end of the month, you'd be using compound interest. At the end of the first day, she would owe you $303. At the end of the second day, she would owe you $306.03. At the end of the third day, she would owe you $309.09, and so on. Just keep multiplying the 1% and adding it to the pricipal each day for thirty days to get what she would owe in thirty days!


With that in mind, now think of that $1,000,000.00 dollar home you fork out on at 6% interest! Now think of that 21% credit card with compounded daily interest! Can you see the theft on top of theft?
Compound interest is what makes credit cards and loans almost impossible to pay off. Ever wonder why you NEVER see a bank offering compounded interest for savings and other interest bearing accounts for the customers? They only offer simple interest for their customers!

So if we get this straight, the Principal is created. The Interest is not, yet they add the compound interest to the principal everyday, thus turning nothing into something everyday upon which you owe! This is why even if everyone in the U.S. tried to pay off their credit card and loan debts they could not! It is virtually impossible!

I bet you they never explained that to you in that credit card agreement or loan contract did they?

dashboy~

[dashboy]

Judge Roy Hit it right on the head as well! Except I did notice he did not devulge who these investors are! Who are these folks who hide in the shadows Judge? And why do they allow the original bank to sue when it is not their (the banks) interest, rights, title, or Capital at stake ultimately?


dashboy~

[The Great Owl]

Originally Posted by dashboy

Who are these folks who hide in the shadows Judge?


dashboy~

I'll field that one. Rothschild, Harriman, JP Morgan, Vanderlip, Warburg, Rockafeller.

Ben franklin had a few good quotes about compound interest too. Funny how in public "schools" they teach you to put a rubber on a bananna, and how it's OK to have 2 daddys, but not time-value of money. Think this is an accident?

Compound interest is sweet enough if you loan assets you actully own, it gets even better when you loan "credit" that you just create with a stroke of a pen.

The only way to beat this racket is to SAVE UNTIL YOU CAN BUY SOMETHING OUTRIGHT! Yeah, I know it might be tough to save up till you can afford to buy a house, and you want equity...blah blah....IMHO real estate is a piss poor investment right now as it is hyper inflated. I think a lot of people are going to lose their shirts when the real estate bubble pops (a lot of people will probably clean up too).

When push comes to shove, you don't really own a home/land anyway. Try not paying your taxes and see who REALLY owns true title to the home you think you own outright.

[BassBoy]

Originally Posted by Judge Roy Bean

......the lending system has been geared to getting most of the investment back early on........

Your Honor, thanks for your input. Ummmm, I thought it was my investment? At least that's what I've been led to believe....."A home is one's greatest investment they will ever make." You hear this all of the time.

Thanks again Your Honor.

Originally Posted by The Great Owl

Compound interest is sweet enough if you loan assets you actully own, it gets even better when you loan "credit" that you just create with a stroke of a pen.

When it comes to bank loan interest, Ed Griffin said it best:

"We banks call it interest, because that is a word that people accept without further explanation. However, it is really a fee for the service of monetizing debt. In other words, we convert debt into money. That is the service Mr. Borrower seeks, and that is the service we banks provide. For simplicity, however, we call it a loan and say we are charging interest."

"When the true nature of a bank loan is understood, it is clear that the bank is entitled to a reasonable fee for this service. The problem arises over the word reasonable. If previously existing money were being loaned out - money that people had to work for, pay taxes on, and save - then today’s bank rates would sound reasonable. But no one worked for this money; no one paid taxes on it; and no one saved it. It was created on the spot. Furthermore, considering that larger loans are usually collateralized with tangible assets, there is minimal risk of loss. The service provided by banks is not a loan in the traditional sense, it is just a bookkeeping transaction. Under these circumstances, we might think that a flat 3% to 5% would be a reasonable fee, depending on the creditworthiness of the client and the value of the collateral. Today’s bank loans, however, are usually far in excess of that, especially considering that they are not one-time flat fees but per annum fees. When the annual rate is multiplied by the number of years that most loans remain on the books, the real fee is shockingly high."

[dashboy]

PJT04,
where did you find Mr. Griffin's quote? I have been looking for that I swear!! I had previously read it but could not remember where! Dam you are good Man!!

dashboy~

[Caveman]

Originally Posted by BassBoy

Ummmm, I thought it was my investment? At least that's what I've been led to believe....."A home is one's greatest investment they will ever make." You hear this all of the time.

There is lots of stuff we hear all the time, that simply isn't true. An investment is something that puts money in your pocket. For you, your home is a place to live. For the lender, it's an investment.

Originally Posted by BassBoy

So, my question is, how do you beat this rip-off?!?!?!?!

You can start by learning how the system works, and then use it yourself. Head down to WalMart and get yourself a financial calculator for less than $30. It comes with a manual that will show you not only how the machine itself works, but how money works.

Anybody can create money out of thin air, just like the bankers. Here's a quick description of the process, from my own personal experience.

Found a property for sale, and negotiated a price of $22,500 to buy it. Negotiated to pay it off over 10 years at $200 a month. The seller accepted, but wanted a down payment to feel comfortable with the deal. I offered her $1,200 cash, not as a down payment but rather as prepaid payments (6 months worth), and told her I would have the money for her as soon as I found someone to buy it from me. She accepted.

I have since (that was 3 years ago) sold that property 4 times, taking a total of $16,500 in down payments, and $17,100 in monthly payments. I have paid out $7,200 in payments to the original seller, but none of that money was from my own pocket. The prepaid 6 months came from the down payment I accepted from the first buyer. My buyers payment is $475, and I take $200 of that and send it on to the original seller.

The "loan" I have from the original seller is at 0% interest. It is simply $22,500 paid $200 per month. It pays to learn negotiation techniques along with financial techniques.

The "loans" I make to my buyers are at 12.75% for 10 years. I've sold this place at several prices, the latest was $35,500. The price doesn't matter. The interest rate I charge doesn't matter. What matters is that the buyer feels like he can pay the monthly amount.

So far that little cheapy property has put $26,400 in my pocket in a bit over 3 years, and I never had to draw on any of "my" money. I've already made more on it that my original purchase price.

Is any of that evil, or a ripoff? No, it's not. I recently got a letter from the original seller (who gets paid early every month, without fail), thanking me for taking that dump off her hands so she could get on with her life, and telling me how grateful she is that she doesn't have to struggle to get her payments.

Each person who bought from me got a good deal. They went from being renters to being owners, which they see as a good thing. Without me providing financing for them, they would still be renters or living in their car.

Everybody wins. Everybody is happy, especially me since I learned to create money out of thin air.

There isn't a reason in the world that you can't do the same thing.