Mystery Solved

(This is a follow-up to the I=PRT post earlier this week.)  I got the information from the bank that holds my car loan, and the mystery is solved. "I" still equals "PRT" so I am once again at harmony with the universe. The problem was how I was calculating “T.” I noticed on the correspondence that interest is compounded daily. I was using a monthly calculation. I’m not happy about it, but at least the math works now. I even looked at when my first payment cleared the bank, and sure enough, it works to the penny. Shame on me for assuming the interest compounded only as often as payments are due (like every other loan I’ve ever had) but at least I know what I’m working with. This little feature adds about 15 basis points to the loan, so the 6.75% rate I thought I was getting is equivalent to 6.90% compounded monthly. (I expected to get the loan at 8% so I can’t really complain.)

I guess if there is any lesson to be learned here is that when borrowing money, check to see how often interest compounds. In theory, since the compounding interim can be infinitely small, the interest on the principal can be infinitely high. (That observation is really just for Dan, Jeff, and Dad, but if you see “one/trillioneth of a second” anywhere on your loan documents, I suggest finding a different lender.)