A long time ago (in a galaxy far, far away) I wrote a blog entitled "How Much Did Han Solo Owe?" From various pieces of evidence in the films Star Wars: Episode IV (A New Hope) and Star Wars: Episode V (The Empire Strikes Back), I concluded that with an initial debt of 10,000 Imperial Credits and a loan with a one-week 15% interest rate, that with weekly compounding, we had an annual interest rate of 780% and an APR of 143,580%. Han defaulted on his one-week term and in fact was not caught by Boba Fett for three years. By then, his compounded debt would have been 29.6 TRILLION Imperial Credits.
The above referenced blog was designed to be fun and to illustrate a point made by Albert Einstein. When asked what was the most powerful of the various forces in the universe, the greatest physics professor and theoretician of modern times said, "Compound interest." However, the above referenced premise is not actually realistic in a real lending environment. The scenario where Jabba is owed 10,000 Credits, and Han is to pay him back 11,500 Credits in one week's time, is what is known in lending as a payday loan, and in real life, there are certain ways this type of loan is done.
First off, the finance charge on a loan of this type would be considered a finance fee of 15 Imperials per 100 Imperials lent. This detaches the fee amount from the length of term. It is not "accrued" as interest at all. It is a fee. On the day that the loan is made, Han owes the 10,000 principal plus the 1,500 fee immediately, and if he was to pay it back the next day, he would still be paying back 11,500. It does not go up every day the way interest does.
Now, if Han does not pay it back in time, which he didn't, it does not continue to accrue, nor does it compound as described in the previous blog. There would be some penalty. On a payday loan, that is often just a returned item fee. Note that payday loans often involve the borrower giving the lender a future dated check, and if the lender goes to cash that check on the maturity date of the note and it's no good, then the borrower owes the returned item fee, which might be something like 35% of the face value of the check. In Han's case that would be another 4,025 Credits for a total owed of 15,525 Imperials. But, for a real payday loan, that would be the end of it. The debt would NOT increase from there.
In Han's case, the penalty was not a returned item fee of 35% but torture by the agents of the Imperial government, freezing in Carbonite, being used as a wall hanging for a half a year, and then being fed to the Sarlac in the Pit of Carkoon. So, really the difference between compound interest vs. payday loan, for Captain Solo is the difference between owning 23 trillion Credits or being tortured and executed. Of course, Han had a white Knight (wearing black) with a green light saber who canceled his debt for him. I guess it's not what you know but who you know.
So, if you find yourself in debt to a gangster, it helps to have a Jedi-Knight on your side and a girlfriend who will strangle the gangster with his own bling-bling chains.