Types of Interest Rates

Whatever type of loan you apply for you can be sure that the loan that you were provided with will carry an interest. How much interest is usually what concerns the BORROWING individuals but if you study loan principles more closely, you should also be concerned with the type of interest that is placed on it. There are several types of interest used by most financial institutions today and they are the following.

 

Simple Interest rate

 

This is the most basic type. Simple interest is paid only once and the rate will not change. For instance if you borrow from a money lender Singapore  the amount of 100 dollars and he tells that the simple interest for one year will be 10% of the principle. This will tell you that the interest for one year would be 10 dollars so when the loan matures after one year you would have to pay the lender a total of 110 dollars.

 

Compounded Interest rate

 

Compounded rate on the other hand will charge interest on the Principal and on previously earned interest. For example if you borrow 100 dollars with a yearly compounded interest rate of 10% and the term of the loan is two years you will be paying a total of 21 dollars in interest. The breakdown is 10 dollars for the first year and 11 dollars for the second year.

 

Amortized Interest rate

 

Amortized interest rates are common to hard asset loans like home and cars. The principle here is for the borrower to pay a larger amount of interest and smaller amount of principal at the first few years of the amortization. As time passes on the amount paid on the principal start to increase while the amount paid on the interest starts to shrink.

 

Fixed interest rate

 

Fixed interest rate is pre-determined and stays the same all throughout the life of the loan. These are usually applied to long term loan.

 

Variable; prime and Discounted Interest rate

 

Variable interest rate changes depending on the underlying interest rate which is the current index value. Prime rates on the other hand are interest rate given to preferred clients while discounted rates are those usually provided by Federal Reserve Bank to other banking institutions.

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