An interest rate is the cost of being able to use money that is provided by a lender. It’s the cost of associated risk and is a way for lenders to make a profit.
Your monthly interest can either be compounded or simple. To calculate it you should be clear about how it is worked out by the financial institution.
Compound interest, is calculated every month on the entire balance of a loan, including previous interest payments.
It is dependent on a number of factors, including the principal, the loan term and the level of risk. If you are regarded as high risk, higher rates will be charged.
Interest rates of personal, car or home loans may be amortising, which means that a set amount is paid every month and ultimately you will have paid off both amounts.
If you apply for a loan, in some instances you may have an option of an interest-only loan. This means that you will start by settling the first portion prior to you even starting to pay the principal amount. This is often the case with some home loan offers, where borrowers can pay the portions owed separately. This gives the benefit of being able to pay smaller amounts initially.
If you’ve invested money or opened a specific type of account with high rates of interest returns you may be able to calculate your interest returns based on how much money you have invested and the rate at which you are charged. The monthly interest you earn will be a factor of the rates offered by the institution, which, in this case, should be way above inflation rates.
By working out what the amount will be, you will be able to plan better financially. This way, you are able to plan ahead and budget effectively.