that your friend will actually make $126.83 in interest if he reinvests each monthly payment at the same interest rate. The extra interest of $6.83 is because of the COMPOUND interest he is earning by reinvesting your monthly payments.

The 12% is called the Annual Interest Rate (AIR).

The 12.6825% is called the Effective Interest Rate (EIR) which is the effective rate the lender achieves if the payments are invested out at the same interest rate each month at the same rate.

Let’s assume your friend decides to charge you the $10 it cost him to acquire the amortization schedule before giving you the $1000. You tell him OK, and to just give you $990 instead of $1000. What is your new AIR now because of this fee?

In essence you are making monthly payments of $88.85 based upon borrowing $1000 at 12% but now you’re only getting $990. A mathematical technique is to calculate what interest rate would satisfy the amortization formula for a $990 loan for 12 payments of $88.85? The answer is 13.92%.