My question if you could kindly assist me is base on the following scenario

How do we know determine the difference between a compound interest loan and a simple interest loan if both must be paid at an APR of 10% with a term of 5 years and a principal of $20000.00

If I remember well the formula for SI is principal*rate%*time and that for
CI is principal*(1+rate%)raised to the power time.

After 1 year my balance is $22000 at the above rate with any of the above formula.
If I make an annual payment of $5000.0 since no daily percentage rate was provided my balance must be $17000.0 carried over into year 2 with either SI or CI formula.

Using CI formula my new balance is $17000.0 (1+0.1) which is $18700.0 carried over to year 3 without making any payments the second year. If I made a payment of $5000.0 in year 2 then my balance is $13700.0 carried over into year 3.

Now this is where I need help
  1. What is my new balance with SI carried over into year 3 without me making any payments the second year?
  2. What is my balance carried over into year 3 after making $5000.0 payment?
  3. What formula do we use to determine the outcome on a simple interest loan?


I know what my balance after 1 year is but I can't use this balance to compute the new interest because that would be based on the rules of compounding. This is why I am lost, correct me if I am wrong.