Hi

If you take a loan of $100 at 5% compounded interest per year, and pay for it over 12 months, you'd have paid the following:

Monthly Payments - $8.56

Total Payments - $102.73

That is clearly less than 5% interest. In fact, intuitively, you'd have expected to pay > 5% in effective interest rate. Yet you don't even pay 5% in interest!

How does this work out??