Question about interest/moneylending terminology

Factual Questions
1

I am trying to write an agreement for a friend who is loaning $20,000 to his brother. The terms of the loan are:

-the brother will be given $20,000
-the brother will repay the loan with $5,000 per year for five years (11 payments of $454.55 per year)
-the total amount of interest paid will be $5,000

(The loan is to help him pay off credit cards; my friend doesn’t actually want interest but the brother insists on paying it as a matter of pride- not that that’s relevant. Both, however, agree that it should be in writing.)

Anyway, in describing the interest:

Should it be said to be 5% annually ($1,000 per year is 5% of the indebtedness)? Is this simple interest? There’s been no real discussion as to how it is amortized, other than it can be paid in full without penalty at any time.

Anyway, please help. (As I said, this is a document for mutual protection and isn’t really meant to be a complicated document- should it be amortized anyway?)

2

Yes, 5% annual simple interest, calculated in advance. That means that interest does not accrue between payments, only at the beginning of the year. Then he spends the rest of the year paying off that year’s interest. (BTW 11 payments per year is kind of weird.)

An early payoff presents an issue. An early payoff, based on what you’ve said here should be in the amount of

number of payments remaining * 363.64

so as not to penalize the borrowing brother.

It should also say what happens in the case of missed or late payments.

3

BTW it would be better to say 25% simple interest on the whole loan amount instead of 5% per year, since the latter implies annual accrual, which isn’t going to happen.

4

Thanks.

It’s so that he doesn’t have a payment for December and can use the money to buy gifts for his wife and kids.