Principal Amount is 25000
No. of Month is 60
Rate of Interest is 9.50
What is an Interest?
Interest is a compensation paid to the lender by the borrower for using the money borrowed. When money is borrowed we have to pay the interest and when we lend money then we earn interest. The idea of interest is the backbone of financial instruments. The interest is calculated as a percentage of the principal borrowed, the amount paid to the lender in the regular time periods.
The points to be considered while calculating the type of interest:
- Opportunity cost or the cost of the inability of the lender to use the money they are lending out.
- Amount of expected inflation.
- Risk of lending and unable to pay the loan back.
- Time period of money lent.
- Extra payments on the interest rate as the intervention by the government.
- Liquidity of the loan being made.
There are two methods for calculating the interest. They are categorized into simple interest and compound interest.
The simple interest is an easy method of calculating the interest rate. It is calculated by multiplying the interest rate by the time period and by the principal. As the simple interest is calculated on daily bases it may be beneficial for the borrowers who pay their loan on time. If the borrower pays off the early every month then the principal balance decreases faster and the borrower can pay the loan sooner than the estimated.
The compound interest is an interest calculated on the principal and the interest rate of previous times of the loan. In compound interest, the rate of interest grows at the faster rate than in simple interest. The compounding rate depends on the frequency of compounding. The more number of compounding periods higher the compounding interest.
The rule of 72:
A quick and easy way to get a rough idea of how the interest doubles over a period of time. The rule of 72 is used to calculate the time period. Just divide the interest rate by 72 we will get the result.
Fixed Vs floating interest:
The fixed rate of interest on a loan means that equal and fixed monthly installments or EMIs. The floating interest rates fluctuate as per the market prices it may increase or decrease. Usually, the floating interest is lower than the fixed rate of interest.
Some interest income is depended on taxes, savings, bonds and certificate of deposits. Some types of interests are fully taxed and some are partially taxed. The taxes have high impact at the end of the balance.
Inflation is defined as the increase in the price when the fixed amount of money cannot be affordable. The average inflation rate is around 3% of the total. Keep the inflation rate at 0% for quick and easy results. But to get the accurate result it is possible to figure out the correct inflation rate.
The components included in the interest calculator:
- Starting principal.
- Annual Contribution.
- Monthly Contribution.
- Interest rate.
- Compound interest rate after.
- Tax rate.
- Inflation rate.
This calculator helps you to calculate the simple and compound interest payments and final balance and differentiate between the different types of rate of interest.