Let’s say I want to borrow $7,000 from a friend. The full $7,000 balance will be due in 5 years (60 months) but, meanwhile, the monthly payments will be interest only during the 5 year term with a lump sum of $7,000 due at the end of the five-year term. The monthly interest-only payments will be $50 per month.

$50 out of $7000 is an interest rate of 0.714% per month, or 8.57% per year. The precise value might vary slightly depending on how you’re accounting for compounding, but at less than 1% over the term in which payments are made, that should make almost no difference.

There are other factors than the interest rate to consider, though. For instance, with a loan from the bank, if you manage to scrape together more than the planned payment, that’ll reduce your principle, and hence your next interest payments. If you get a windfall and pay your friend $750 one month instead of the agreed-upon $50, will he reduce your interest payments to $45 a month (keeping the same interest rate)?

$50/month on $7000? - easier to calculate because no declining balance.
$50x12=$600/yr on $7000; or ((600/7000)x100)% or 8.57142857142857142857142857… percent.

“Interest is 8.57143 percent per annum rate, paid monthly.” Compounding doesn’t count unless you want tocalculate a weekly or daily rate. As laid out, you are paying each amount as due, and therefore no balance accumulates (or declines).

Now, how that compares with a regular loan where you pay the whole lot in small payments is a whole disssertation. It depends how you value keeping the full principal until the final due date.

So, if I borrow the money on 2/1/10 and the first $50 payment is due on 3/1/10, then the final payment of $50 will be due on 2/1/15 along with the $7000 principal balance. Right?