In banking industry interest rate is single most important factor for both the lender and the borrower. Whenever a person decides to go for financing, he look at interest rate to calculate whether loan offered to him is feasible for him or not. Similarly, Interest rate is of utmost importance for a lender as well. Of course there can be no lender who lends money without  interest .

There are two basic forms of interest. Simple Interest and Compound Interest. Simple interest is one time interest amount on the total amount borrowed, in other words, Simple interest is calculated only on the principal amount, or on that portion of the principal amount which remains unpaid. while in case of on  compound interest, interest is stacked the principal each time period , that may be annually, monthly, weekly or daily. In Compound interest, unpaid interest is added to the balance due, so, the borrower is charged interest on previous interest.

Example of compound interest

a loan,  may have its interest compounded every month, like a loan with $100 initial principal and 1% interest per month would have a balance of $101 at the end of the first month, $102.01 at the end of the second month, and so on.

You must know how to calculate interest, before going for financing. There are four basic factors that you should know in order to calculate the interest, these include, Principal amount, interest rate, time duration, and the type of interest, whether simple or compound.

Terms Used in calculating interest

These terms are briefly describes as:

1. Principal: the amount of the money that is borrowed.
2. Interest Rate: the price a borrower have to pay for the use of money . Interest rate is normally expressed as a percentage rate over the period for one year.
3. Time Duration: Term of the loan.

4. Interest Type : Compound or simple interest

However loans may also have different interest rates applied over the entire term of the loan, where the changes to the interest rate are managed by a specific criteria other than an underlying interest rate. For example, there may be a loan that uses break outs in terms of specific periods of time to dictate specific changes in the rate, such as a rate of 10% in the first year, 11% in the second, and 12% in the third and so on.

Whatever is the type of  loan, and whatever  the type of interest applied, you most  know the basics of interest rate and how interest rate are   calculated ,this will help you  understand and manage your finances better.

Technorati Tags: Interest,Rate,Loan,money,Compound,Principal,percentage,rates,factors,periods,borrower

Related Articles

• How To Drive Away With Blank Check Auto Loan?
  Blank Check Auto Loan is a no hassle experience from start to finish. For financing a car, Blank Check Auto Loan is a straightforward, generally simple and fast process. It protect both the lender and the borrower....
• Loans with Bad Credit Report
  With bad credit score it is difficult to find lender but still there are some types by which the loan can surly be granted. The cost of such loans is higher because of bad credit reputation and High APR. So with such means one can borrow money quickly but...
• Get a Consolidation Loan to Pay Off Debt
  Consolidation loan can be a good choice for those dealing with more than two unpaid loans. This aloan merges all outstanding debts into one loan and makes it easier for a borrower to repay all of them in one loan....
• Loan For Starting A Small business
  It is quite helpful if you do a small business a part from your job. But for staring it, a lot of money is required. This financial need can easily be fulfilled by the small business loans. For this, the online financial companies are the best solution. ...
• How to Payoff Credit Card Debt Faster?
  There are various ways through which you could pay off your credit card debt faster. It is very important that you pay it off soon so that you don’t accumulate higher debt payments. There are various strategies which you could adopt so that each month you...