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:
-
Principal: the amount of the money that is borrowed.
-
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.
-
Time Duration: Term of the loan.
-
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
how to calculate gold loan interest