Can someone please help me with this? What does it mean for interest on a loan to compound monthly?
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12 months in a year
does this mean interest is added 12 times in a year?
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Also, how does that affect the formula for figuring out payment amounts, interest amounts, etc?
compounding monthly means interest is computed every month as opposed to compounding annually.
For example, suppose an interest rate is 12% (unrealistic, I know...).
if you put in 100 euros into the bank at that rate, at the end of the year you get 12 euros interest so now you have 112 euros.
monthly compounding is the compute the interest 1/12 of 12% so 1% of 100 euros so at the end of 1 month you have 101 euros. then for the next month, you'll take 1% of that 101 euros to get your total for that month. it continues for 12 months. In the end, you'll end up with just a little bit more euros than if everything was computed at the end of 1 year.