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How to calculate bank interest

bank interest

Bank interest is defined as a financial fee paid for obtaining money from a financial institution that represents a bank or an investment company. For the borrower, it is the cost of renting money. It is usually expressed as an annual percentage of the capital. It is affected by the money supply, financial policy, the amount borrowed and the creditworthiness of the borrower. And the rate of inflation, and there are two types of bank interest, namely simple interest and compound interest, and in this article it will be explained how to calculate bank interest for both types.

How to calculate interest

The Bank Many people resort to obtaining loans from banks, to meet their needs, either in order to increase their income during a certain period or to finance something, such as: buying a new house, or a car, and many other purposes that meet their needs, and whatever the purpose of the loan must be. The borrower must know the type and nature of the interest on his loan and how to calculate it, as banks use several methods in calculating the interest of the bank, and these methods differ according to the type of interest.

types of interest

There are various and different forms of interest that vary according to many bases, and the different types of interest are similar to many elements, such as: the number of years, the type of interest and the value of the loan, and the interest is generally divided into two types, namely:

simple interest

There are many methods used that show how to calculate the interest of the bank, each method changes the amount of interest that is paid, so it is better for the borrower to know how to calculate the interest of the bank, when the bank quotes an interest rate, it quotes the so-called effective interest rate, also known as Annual Percentage Rate (APR), the effective interest rate, or effective interest rate, differs from the declared interest rate, due to the effect of compounding the interest, and banks may also link the interest rate to a benchmark, usually the key interest rate.
  • How to Calculate Bank Interest on a One-Year Loan If you borrowed $1,000 from a bank for a year and had to pay $60 in interest for that year, the stated interest rate is 6 percent. Here is the account:
Effective interest rate on a simple interest loan = Interest / Principal = $60 / $1,000 = 6 percent

At the same time, this private loan becomes less favorable, if the money is held for a shorter period of time, for example, if the borrower has borrowed $1,000 from a bank for 120 days and the interest rate remains at 6 percent, the effective APR Much higher.

Effective rate = Interest / days x days per year (360) / day loan is due
Effective interest rate on a loan of less than one year = $60 / $1,000 x 360/120 = 18 percent Effective interest rate is 18 percent
Since the borrower only uses the funds for 120 days instead of 360 days.
  • The actual interest rate on installment loans Many consumers have installment loans, which are loans that are repaid with a specified number of payments, most car loans are installment loans, and it is one of the most confusing interest rates as interest rates on installment loans are among the highest interest rates, for Example:
Effective rate on installment loan = 2 x number of annual payments x interest / (total number of payments + 1) x principal loan rate / effective installment = 2 x 12 x $60 / 13 x $1,000 = 11.08 percent

Interest on compound loans

Bank interest on loans is calculated based on compound interest, which is the value of the interest that is calculated on the original - initial amount, and accumulates over time. Compound interest is called the idea of ​​interest on interest, and compound interest is calculated by a set of mathematical equations, and the following is the basic law for its calculation:
  • Mathematical law for calculating compound interest: the principal amount x [(1 + q)^n-1], the interpretation of the mathematical law: based on multiplying the value of the principal amount - by the constant one plus the rate of interest -, raised to the basis of the number of years, and subtracted from the value of the constant one .
  • Mathematical law for calculating compound interest: Principal Amount x [(1+P)^n-1], explained by multiplying the value of the principal amount by the constant plus the interest rate, raised by the number of years, and subtracted from the value of the constant one.
  • Interpretation of Mathematical Law Symbols:
Principal Amount: The initial or initial amount of money.
Constant 1: is a constant number within the mathematical equation.
Q: is the interest rate or rate charged on the principal amount.
N: The number of years in which the loan amount must be repaid.
  • Compound interest example: If the loan amount is $10,000 with an interest rate of 5 percent that accrues annually for 3 years, what will be the amount of interest?
  • Solution: The previous mathematical law is applied by substituting its values ​​on the example given:
Original Amount x [(1+P)^n-1]
10,000 x [(1 + 0.05) ^3 - 1] =
[1.157625 - 1] = $1,576.25, which is the value of the money amount after adding its compound interest over a period of three years.
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