Financial literacy and more
All about borrowings
Every loan agreement that has a floating rate of interest has a reset period which is the time when changes will occur to the interest rate on the loan.
The benchmark rate determining the floating rate might change at any point.
This does not mean that the change is applicable from the next day to the individual borrower.
For a particular borrower the rest period is when the changes will be reflected.
A reset period could be every quarter or even half yearly or annually.
A floating rate of interest changes with the change in interest rates in the economy.
This means that there is not going to be a fixed rate over the entire duration of the loan.
The interest rates could go either up or down depending on the economic conditions.
The floating rate would change at a specific interval that is decided in the loan agreement.
This rate of interest can lower or raise the amount to be repaid making planning tougher for an individual.
A fixed rate of interest means that the rate charged for the loan remains the same over the entire duration of the loan.
The interest rate does not vary which brings an element of stability to the loan.
The individual borrowing the money also knows the rate of interest being charged right from the start of the loan.
The fixed rate only changes when there is an abnormal situation or emergency.
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This makes planning for such loans and their repayment easier for the borrower.
To understand the interest rate properly one has to ensure that the right figure is being compared.
The annual rate of interest is the most standard way to compare rates on different loans.
Lower rates attract the attention of borrowers as it makes the loan look cheaper.
Often the state interest rate is not annual but for a shorter duration.
The shorter duration rates need to be converted to an annual rate for ease of comparison.
The interest rate that is charged on the loan is based on the capital that is actually borrowed.
Sometimes a bigger or smaller borrowing could have different rates of interest charged on it,
The time for which the loan is being taken is also a factor that determines the interest rate
The purpose for which the loan is being taken impact the interest rate. If there is no security backing the loan than the interest rate would be higher.
The interest rate also depends on the financial history of the person taking the loan.
Interest rate is a percentage figure that a person has to pay on the amount of the loan.
The interest rate is charged every year.
This leads to an interest cost arising over the period of the loan.
The interest cost enables one to know the actual amount that is being paid.
It is also the best way to compare different loans in terms of the cost being incurred for a loan.
A loan is taken for a specific amount that is known as the capital.
The repayment of the loan will also include interest.
This means one has to pay back more than what was borrowed.
The loan working usually leads to interest being recovered before the capital is repaid.
This is why there is often confusion where people have paid back a large sum of their loan but still there is a significant capital remaining to be paid back.
The actual amount that is borrowed by the individual is known as the capital borrowed.
This is the base amount that has to be paid back to the lender.
This is actually the amount that is required as funds for the individual which leads to a loan being taken.
It can vary according the need of the individual.
One has to distinguish the capital from the interest because paying back interest does not lead to the loan obligation being over.
Interest is the amount that is paid by an individual for borrowing money from someone else.
This is the extra amount that has to be paid to the lender for giving the money.
For example if there is a loan taken for Rs 10,000 then this is the capital amount.
If the individual pays Rs 10,800 back to the borrower then the extra Rs 800 is the interest.
This becomes the cost for the borrowing so it is an important factor to consider,
A loan is an amount that is borrowed by an individual from someone else like a bank or other financial institution,
A loan can also be taken from another individual.
There is a specific amount that is taken from the lender.
This has to be paid back on a specific date or in installments as maybe decided while taking the amount..
There is usually a cost that has to be paid for the borrowing called interest.