Funding
Simple (non-compounding) charge
A simple charge — what a lender would call simple interest — is calculated only on the original amount advanced, never on accumulated charges, so the balance does not grow on itself.
On a $2,500 advance at 25% per six-month period, each period adds $625 — the same $625 every time, because it is always 25% of $2,500.
Under compounding, the second period would be charged on $3,125 rather than $2,500, and every period after that on a larger number again.
Over a case lasting two years the difference between the two structures is substantial, and it grows with time.
Related terms
- Compounding — Compounding is when charges are calculated on a balance that already includes previous charges, so the amount owed grows on itself over time.
- Cap — A cap is a hard ceiling on the total amount repayable on an advance, expressed as a multiple of the amount advanced — beyond which the balance stops growing regardless of how long the case runs.
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