Now a day’s economic condition of a person can suffer any time. In such situations they have no other option than to take a loan for themselves or for some other personal situation. One can apply for a personal due to medical reason. Some might opt for a personal loan for his or her family like for vacation or education. To buy an expensive article like an air conditioner or computer then also one might take a personal loan. But before taking a loan one should be aware of all the types of rate of interest that are now there in the market.
Different types of rate of interest on loans
People in hard economic situations may sometime need to borrow money from lenders and other institutions. When they are going to pay the money back at that time they have pay extra amount of money. The calculation by which we come to know how much extra money we have to pay is called interest rate. There are differ ways to calculate interest rate which are described below.
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Simple interest – The term simple interest represents the most common type of interest rate. Thus simple interest does not change and is paid only one time. Take an example. Let us say a person has borrowed 100 dollar which becomes the principal for one year. The rate of the interest at which the money is borrowed be 10%. So applying the simple interest rate after one year the person has to pay 110 dollar.
Compound interest – Compound rate interest is calculated on the principle and also the previously earned interest. If a person borrows 100 dollar at the rate of 10% for a term two years then the interest after first year will be 10 dollar and after the second year it will be 11 dollar so making a total interest of 21 dollar. This type of interest of rates is used for credit cards and savings accounts.
Amortized interest – For home and car loans this amortized rates of interest are very common. This is calculated on the basis that the borrowers have to pay a large amount of interest with a smaller amount of principal at the beginning of taking the loan.With time the money which was taken as a principal that was paid increases each time before there is a decrease in the principal amount and thus the rate changes.
Fixed interest – A fixed rate of interest stays fixed for the whole life time of the loan.
Variable interest – Depending upon the current index value the variable rate of interest changes.
Prime interest – This rate refers to the rate of interest that is used by commercial lenders. This lenders use this rate for their most credit worthy clients.
Discount rate – This type of rate is issued by the Federal Reserve Bank. They make this kind of rate of interest to the ones who apply for short term loan to a financial institution.