Effects of Compounding Interest
Problems involving the time-value of money are
dynamic. The simple act of entering into a contract to
repay a loan can prove to be frightening when the
extent of the repayments over a lengthy period is realised.
This arises from the compounding of interest.
Financial institutions will make
their interest calculations daily, meaning that the effective interest rates
are higher than the advertised per annum interest rates. A
smart borrower can minimise the long-term accumulation of interest payable
by choosing to make loan repayments fortnightly instead of monthly,
for example.
The construction of a relatively simple system dynamics model
enables simulation of almost any loan repayment scenario, from the
repayment of a housing mortgage through to determining the interest
which accumulates month-by-month in a credit card account.
A system dynamics
simulator for calculating loan repayments is at Loan-Repayments-Simulator.sip. It
is described at Loan-Repayments-Simulator.pdf.
