SIMPLE AND COMPOUNDING INTEREST

What’s the Difference?

People who borrow money from a financial institution are charged an extra cost called interest, which they regularly pay the company at a given rate for the use of the borrowed money. There are multiple ways of calculating interest, and each affects the total amount of money owed by a borrower. Simple interest, for example, is calculated as a percentage of the principal amount of capital. On the other hand, compound interest is calculated on the principal amount and the accumulated interest of previous periods. To illustrate the significant difference each of these two methods makes on the total money borrowed, we have provided a hypothetical example below.

A single mom suffered a workplace injury as a nurse and is waiting for her lawsuit to happen. She is in need of a $10,000 advance because she has spent all her money on medical needs, therapy, and transportation, and now she can’t pay her bills. Her attorney is confident she will receive a nice settlement amount, but until that happens, she is in a tough spot.

The woman has three options. She can get an advance from the Bairs Foundation, which accrues simple interest. Or, she can go with Legal Funding Company #1 or Legal Funding Company #2, both of which use compound interest. Below is a breakdown of the interest the woman would accrue over one, two, and three years if she obtains funding from the Bairs Foundation versus Legal Funding Company #1 and Legal Funding Company #2. The chart below shows how her interest would accrue with each option.

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After three years, the interest accrued by Funding Company #1 and Funding Company #2 are about double and triple that of the Bairs Foundation respectively.

Here’s another way to view how the interest grows each year.

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Clearly, compound interest that accrues can end up being more than the original amount a person borrowed.

As you can see, it is usually in the best interest of the borrower to find a simple interest arrangement, as the total amount owed tends to be substantially lower.

We Can Answer Your Questions

Call the Bairs Foundation toll-free at (855) 836-2676 or email info@bairsfoundation.org if you have further questions about interest rates and your options.