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John Bair
John Bair
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The Difference Between Simple and Compounding Interest

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When requesting pre-settlement funding, one of the most important factors to consider is how a funding company will charge interest. This extra cost will be tacked on to the amount the borrower pays back to the funding company for the use of the money. There are multiple ways to calculate interest, and each method will affect the total amount of money owed.

Simple interest is calculated as a percentage of the principal amount of capital. This means that the interest accrues evenly and steadily based on one set amount — the principal capital that was given. The Bairs Foundation charges seven percent simple interest to families in litigation who need pre-settlement funding.

borrowing capital during litigationIf, for example, a plaintiff receives pre-settlement funding in the amount of $10,000 from the Bairs Foundation to help with bills during her lawsuit, with seven percent simple interest she would owe the following:

  • $10,70.000 at the end of one year,
  • $11,400.00 at the end of two years, and
  • $12,100.00 at the end of three years.

The interest accrues at the rate of seven percent per month, but it is always based on the $10,000 that was originally funded.

In contrast, compound interest is calculated on the principal amount and the accumulated interest of previous periods. If the same plaintiff receives pre-settlement funding from another company with 30 percent compounding interest, she would owe the following:

  • $13,448.89 at the end of one year,
  • $18,087.26 at the end of two years, and
  • $24,325.35 at the end of three years.

Ultimately, the amount of interest accruing month over month grows and grows, since the amount on which it is based increases month over month as well — unlike simple interest, where the principal amount the interest is based on stays the same.

Many funding companies in the non-recourse industry are known for charging even higher interest rates than shown here. To better illustrate how much the cost to plaintiffs can potentially grow, the Bairs Foundation website has taken this scenario further to show compounding interest at 50 percent for the same pre-settlement funding amount. With these interest rates, a plaintiff could be looking at a staggering total of money owed after just three years of accruing interest.

Unfortunately, this scenario is very real for many plaintiffs. Some non-recourse funding companies tack on compounding interest at such high rates, the money a plaintiff owes soon becomes more than the lawsuit is worth. Instead of leaving families to drown in debt, the Bairs Foundation has created a new funding model. The foundation provides low-cost access to capital at seven percent simple interest, so plaintiffs have the resources to go the distance with their lawsuit.

Visit the Bairs Foundation website or call (855) 836-2676 if you’re a plaintiff in litigation and have further questions about interest rates and your options.

 

About John Bair

John Bair has guided thousands of plaintiffs through the settlement process. Motivated by a desire to assist others in protecting their financial well-being, John and his wife Amy established the Bairs Foundation. At seven percent simple interest, the organization provides the financial assistance families need during litigation. Read more at http://www.bairsfoundation.org/.

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