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Interest on loans
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On
all loans it is almost always a fee, this fee paid on borrowed capital
is called interest. Interest is calculated upon value of assets, and can
be thought of as rent on money.
Interest
is a compensation to the lender that relates to the cost of borrowing
money. It is the price that a lender charges a borrower for the use of
the lender’s money. This cost is often looked upon as lost rate of
profit.
There
are many types of interest, but the most common ones are simple interest
and compound interest, and rates is usually either fixed or floating.
Simple interest is calculated only on the principal (principal is the
original amount of a debt on which interest is calculated), or of the
principal which remains unpaid. It is calculated according to the
formula I = ( r * B ) * n (where r is the period
interest rate, B is balance, n is number of time periods).
Compound
interest is similar to simple interest, but as time goes the difference
becomes lager. The conceptual difference is that the principal changes
with every time period. Put another way, the lender is charging interest
on the interest. I = B * (( 1 + r )^n – 1)
Loans
generally use compound interest, but they may not always have the same
singe interest rate over the life of the loan. Loans that have a
changeable rate over the life of the loan are loans with a floating
rate. Whereas a loan where the interest rate does not change are
referred to as fixed rate loans.
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