What is the interest rate?
Interest is a compensation paid to the lender by the borrower for using the assets borrowed. The idea of interest is the backbone of financial instruments. The interest is calculated as a percentage of the principal borrowed. The interest rate is calculated on annual basis is known as the annual percentage rate (APR). The assets can be cash, consumer goods, real estates, vehicles etc.
Annual Percentage rate:
An annual percentage rate is the rate of interest charged annually for borrowing or interest earned through investment. This rate of interest is expressed in the percentage that is calculated annually over the term period of the loan. The APR includes nominal interest rate and other cost or fees in procuring the loan. The APR has a higher interest rate when compared to the nominal interest rate.
The reasons why the interest rate fluctuates:
- Political short-term gain: The lower interest rate can help in the economy the short-run boost.
- Deferred consumption: The customers prefer goods now to the goods later. The delay in spending the money on goods and then there will be a positive interest rate.
- Inflationary expectations: The money can buy few goods in the future than now so the lenders give compensation for this to the borrower.
- Alternative Investments: The lender has different choices to make the investments.
- Risk of investment: The banker charges the risk premium on the loan to ensure that he is compensated for the fail like bankrupt, abscond, die etc.
- Liquidity Preference: The customers prefer to have the resources for immediate use than waiting for the resources.
- Taxes: The gains from interest are mainly subjected to the taxes.
- Banks: The interest rate changes based on the slow down or speed up of economic growth.
- Economy growth: If the economy is high the interest rates are high and the economy is low the interest rates will be low.
The components included in the interest rate calculator:
- Loan amount: The amount borrowed as the loan.
- Loan term: The time period of the loan borrowed.
- Monthly payment: The monthly payment made on the loan.
The interest rate calculator is used to determine the real interest rate on loans with the fixed monthly payments.