You might be tempted to conclude that the lender made only $661.85 in interest for the year. You would be correct if the lender took your monthly payments and put them under a mattress. However the lender reinvests your monthly payments each month (deemed reinvestment) and ends up with more interest due to the compounding effect.

The effective interest rate (EIR) for this loan is 12.68250% because of monthly compounding. Take the EIR as a decimal and add 1 to it and you have

1.0 + 0.126825 = 1.126825

$10,000 x 1.126825 = $11,268.25

In essence the lender gets back his $10,000 at the end of the year plus $1,268.25 in interest due to reinvestment. The EIR is a very informative number because by adding 1 to it and multiplying by the original you discover the lenders actual return on investment.

As further proof of this make all the payments zero in the amortization schedule and you discover that the accumulation is the same $11,268.25 after 12 payments.