Interest Rate - Interest-Rate Explained
Interest is a fee or rent on money when borrowed, a compensation to lender. The actual amount is principle and the amount which lender charge extra is called interest, this fee is charged usually on percentage bases, the percentage is called interest rate.
The interest rate now a days is considered price of money and controlled by many laws, specially since the modern banking almost control all the money in the world, goverments and banks have set standards and laws to control interest rates because now a days from home to car even food is part of credit system. There are two main methods of calculating interest simple interest and compound interest.
Simple Interest: The simple Interest is calculated on the principal, or only on that portion of the principal which remains unpaid ("loan balance"). If you borrowed $1,000 and paid off $100 in first month, now you will be charged interest on $900 (remaining balance).
Compound Interest: In compound interest the principle balance changes as the time passes, the lender adds interest to principle balance and then charging interest on total amount which means interest on interest.
Fixed Interest Rates: This is very common form of interest, the lender decides the percentage for the life of loan, and interest rate does not change which usually ends up with fixed monthly payment. Traditional home mortgages and car loans are common examples of fixed interest rate.
Floating Interest / Adjustable Interest Rate: This is a new way of calculating interest in which interest rate may change over the period of loan, In floating interest there are adjustment periods where your rate will change and your payment may increase of decrease based on current interest rate. ARM Mortgages and credit cards are common products of adjustable interest rate.
In united states interest rates are connected with prime rate and does effect daily life and control of money. The interest rate you receive from lender or your bank is also dependent on your personal credit history. A good credit history means you will receive the lowest rates because lender look at you as low risk investment.
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