It is a simpler form of computing interest on the principal amount as the term of the loan is considered for that year only, and interest is charged or provided every year on the same original sum deposited or lent, as applicable. Interest can be earned as simple interest and compound interest. People deposit excess money in banks and financial institutions to earn additional income as interest depending on the time value of money and the compounding effect. In the event of pre-payment, a penalty and interest are charged from the borrower to avoid the loss of regular income considering the time value of money. ![]() ![]() In the event of default, banks or financial institutions stop charging interest and reclassify the assets in their books. They might charge hefty interest on the sum lent with certain other additional conditions. Private lenders also provide loans to borrowers, but their terms and conditions might differ from the conventional loans obtained from banks or financial institutions. In that case, it might be possible that banks might not lend money at all or by charging extreme interest rates or keeping the double amount of collateral security. Suppose the borrower has a low credit rating. Interest rates on borrowings are fixed depending on the type of borrower and the credit rating associated with him. Interest rates on borrowings and deposits may defer considering the purpose and to whom the amount is given.īorrowing has become prevalent in terms of the smooth functioning of trade practices and proper regulation of money in the economy, and the process of borrowing money has also been relaxed to help businesses grow.īorrowings not only ease money problems but also helps the borrower in planning the finances better. In terms of the receiver, a person who deposits money to any bank or financial institution also earns additional income considering the time value of money, termed as interest received by the depositor. Interest rate is the amount charged over and above the principal amount by the lender from the borrower. ![]() Interest is income earned on the funds utilized by the person holding the same. A charge on profits is not always welcomed, but all appreciate income in any form.
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