Financing: Simple Interest Question ????

[Mark099]

Originally posted by Geoff_M
But that's because the amortization table for a simple interest loan and a compound interest loan will look identical as long as the payment is made each time interest is accured (as monthly mortgage payments are).

That's my point. They are identical, but why would two CMs seem to go way out of their way to say DVC financing would ultimately cost us less money because the interest doesn't compound?

 

[Geoff_M]

What would the monthly payment be under your definition of a simple interest loan?

 

[Geoff_M]

since the monthly payment pays off the interest first it effectively compounds (i.e. accrue = compound) because there is less principal reduction

Less reduction than what exactly?

Accrue <> Compound.

From Merriam-Webster:

Main Entry: com·pound
Pronunciation: käm-'paund, k&m-', 'käm-"
Function: verb
Etymology: Middle English compounen, from Middle French compondre, from Latin componere, from com- + ponere to put -- more at POSITION
transitive senses
1 : to put together (parts) so as to form a whole : COMBINE <compound ingredients>
2 : to form by combining parts <compound a medicine>
3 a : to settle amicably : adjust by agreement b : to agree for a consideration not to prosecute (an offense) <compound a felony>
4 a : to pay (interest) on both the accrued interest and the principal b : to add to : AUGMENT <we compounded our error in later policy -- Robert Lekachman>

If accrue = compound, then Merriam-Webster has used a recursive definition!

 

[Mark099]

Originally posted by Geoff_M
What would the monthly payment be under your definition of a simple interest loan?

Using my example above... $117.77 per month.

 

[Geoff_M]

Can you show us how you arrived at that figure and possibly give us an example of an amortization table for the loan?

 

[Geoff_M]

OK, I found one page that boils the whole issue down:

http://www.canadamortgage.com/articles/learning.cfm?DocID=2&CFID=430363&CFTOKEN=21615019

Constrast that with the U.S. Federal Reserve link I posted a couple of pages back. Bottom Line: The US and Canada use two very different definitions for "simple interest loans".

So, to wrap things up... DVC is not doing anything underhanded by calling its mortgages "simple interest loans". That definition fits the one used by US financial institutions as prescribed by law.

 

[Mark099]

Originally posted by Geoff_M
Can you show us how you arrived at that figure and possibly give us an example of an amortization table for the loan?

I have been searching the 'net for software which could be downloaded to allow for non-compounding loans. No luck yet. I do, however, have a financial calculator which allows you to manually set the compounding frequency to anything you want.

 

[Mark099]

Originally posted by Geoff_M
So, to wrap things up... DVC is not doing anything underhanded by calling its mortgages "simple interest loans". That definition fits the one used by US financial institutions as prescribed by law.

I think I have pretty much conceded to the legal use of the term "simple interest" loan.

However, it still hasn't been clarified as to why this is a better type of loan? Anyway, I am off tomorrow morning and will give QA and MS a call to see if they can shed any light on why they focused so much on telling us the loan doesn't compound.

 

[EmptyNester]

Originally posted by Mark099
Because the monthly payment is the same for both... DVC's "simple interest" payment = everybody's "monthly compounded" rate payment.

If I understand the Canadian "compounding interest loan" correctly, a $10,000 loan @ 10% for five years means $5000 would be paid in interest.

In the US, a "simple interest loan", for the same $10,000 borrowed for five years would cost ~$2748 in interest over the same term. This is assuming that the payments are made on the due date every month. Payments made early and/or additional principal payments would reduce the total amount of interest of interest over the term of the loan. Late/missed payments would result in higher interest.

Do I have this right? If so, big difference in the total cost of the loan.

- Sharon

 

[Geoff_M]

I think I have pretty much conceded to the legal use of the term "simple interest" loan.

However, it still hasn't been clarified as to why this is a better type of loan? Anyway, I am off tomorrow morning and will give QA and MS a call to see if they can shed any light on why they focused so much on telling us the loan doesn't compound.

Mark,

I don't think anyone, myself included, has claimed that a US "simple interest" loan is better than a Canadian "simple interest" loan (or that one definition is better than the other). What we're trying to get you to see is that what DVC told you was proper.

Legally speaking, the interest on US "simple interest" loans does not compound. If you call DVC, you're gonna get the same response that you've gotten by many here. Legally (in the US) and mathematically speaking, DVC mortgage interest isn't compounded. If the DVC were to tell you that the interest on their loan was compounded, it would mean something different than your notion of compounding... and they could get into trouble legally if they started mixing definitions with customers. The definition isn't "DVC's", it is "everybody's" here in the US.

It's kind of like football. If I invite a European friend to a "football" game here in the US, they might protest upon arrival "Hey, this isn't football!!!" Obviously "American" football is different than the non-Englishing speaking world's notion of "football", but that doesn't make all of my pre-game talk about going to a "football" game incorrect, deceptive, or anthing else like it. Nor would it be improper of me to continue to call the game "football" after we arrived and I realised that my friend and I have to different definitions of the term. Nor would it be improper for my friend to call the sport "American football".

 

[Doctor P]

I have sat on the sidelines on this one up to now, but I think a point should be made that has not yet been made. Disney definitely uses simple interest on their loans, though the payment they use is based on typical amortization. When we paid off our loan on our first purchase and got the loan history it was very clear that Disney was calculating interest based on how many days in the period you were using the money rather than just a simple amortization chart (my auto loans have never done this I can tell you). This meant a significant savings when it came to pay off the loan.

 

[Mark099]

Originally posted by EmptyNester
If I understand the Canadian "compounding interest loan" correctly, a $10,000 loan @ 10% for five years means $5000 would be paid in interest.

In the US, a "simple interest loan", for the same $10,000 borrowed for five years would cost ~$2748 in interest over the same term. This is assuming that the payments are made on the due date every month. Payments made early and/or additional principal payments would reduce the total amount of interest of interest over the term of the loan. Late/missed payments would result in higher interest.

Do I have this right? If so, big difference in the total cost of the loan.

- Sharon

Your first example is only true if ONE $15,000 payment is made at the end of the 5th year.

 

[Mark099]

ANYWAY, I spoke with QA this morning and presented my case. The woman wasn't aware that both types of loans ("US simple interest" vs. monthly compound) yielded the same amortization schedule. But, knowing that, she agreed that the CMs were wrong in saying the loan doesn't compound. Sure, DVC would rather use the term "accrue", but the implications that it is a cheaper loan is incorrect. Yes, I believe we were misled a bit. Perhaps, not deliberately, but because they lack all the knowledge required to compare different types of financing.

Like I said before, this issue will not likely affect our membership status and as long as it doesn't happen again to someone else I will be happy. I told her the financing should always be presented as a mortgage, but with two benefits...

1) you can use your credit card to pay it off, and/or
2) you can pay it off anytime you want without penalty.

 

[Geoff_M]

Mark,

I'm glad that QA was able to give you some satisfaction and you're not letting the issue impact the decision to join DVC... you're gonna love it.

But in this "farewell" post to this thread, I can assure you that when a US citizen walks into a DVC presentation and hears the terms of the financing, anyone whoever has taken out a car loan/home mortgage/etc., reasonably understands the terms of DVC financing as explained by the agents. Walk into any bank, mortgage broker, etc. in the US and you'll hear the same thing. The agents only fault was not knowing the difference between the US and Canadian definitions of financing terms. I also am not sure how the agent tried to sell you the idea that a DVC "simple interest" mortgage was a cheaper finance option than any other conventional home "simple interest" mortgage.

Accrue does not equal compound in the US in any sense... Accrue merely means an interest (in this case) amount is periodically calculated and placed into an account and left there until paid per the terms of the loan. Compounding in the US definition means that the unpaid accured interest has a direct impact on future interest accrurals. In the Canadian sense (per what I read on the CanadaMortgage site) it is a very broad definition meaning any loan in which any interest is paid to the lender before the end of the loan. That definition does not even speak to the method in which interest is accrued... which is the point of the US definitions. It's not that the DVC "would rather" use the term "accrue" vs. "compound" to talk about when interest is paid... it's that "compounding" here has nothing to do with whether or not intererest it paid to the lender before the end of the loan.

With that, have a good day... and "welcome home".

 

[EmptyNester]

Originally posted by Mark099
Your first example is only true if ONE $15,000 payment is made at the end of the 5th year.

OK, I get that now. Canadian mortgages/loan terminology make for some interesting reading. I can see why Mark099 thought he was being misled.

I found a loan calculator @ http://www.canadamortgage.com/calculators/amortization.cgi for anyone who might want to compare a US loan to a CAN loan. (If I plug in: $10,000 loan for 10 years @ 10.75% I get a payment of: $136.34 US vs. $135.03 CAN.)

- Sharon

 

[Mark099]

Originally posted by EmptyNester
OK, I get that now. Canadian mortgages/loan terminology make for some interesting reading. I can see why Mark099 thought he was being misled.

I found a loan calculator @ http://www.canadamortgage.com/calculators/amortization.cgi for anyone who might want to compare a US loan to a CAN loan. (If I plug in: $10,000 loan for 10 years @ 10.75% I get a payment of: $136.34 US vs. $135.03 CAN.)

- Sharon

Yes, that is because Canadian mortgages compound only twice a year instead of 12 times. It doesn't look like a lot, but if you take the difference over a 20-30 yr period it can add up.

 

[Mark099]

Thanks for all the input everyone. Keep in mind, this was never about differences between CDN and US mortgages -- once I figured out simple interest has a different meaning as soon as I cross the border. It was about the wrong information communicated to us during our open house visit. Heck, even my wife remembers hearing everything and that doesn't happen very often.

Our first trip home will likely not be until Sept/Oct 2006 and will include our first cruise with DCL. My job requires that someone be available to take my place while I am on vacation and there is no guarantee that that could happen with certainty in 2005.