Lending rate or interest rate is the amount charged by lenders for a certain period as a percentage of the amount lent or deposited. The total interest on the amount or the principal sum is determined by the duration of time over which the amount is deposited or lent.
Most loans use simple interest. However, some also use compound interest, which includes interest on the principal amount as well as on the previously accumulated interests.
Low risk loans are usually charged low interest rates while loans which are considered as high risk are charged higher interest rates.
Risk is determined by looking at the credit score of the borrower. Therefore, it is important to have a good credit score to avail the best loans possible.
Interest rates are applied to most transactions which involve lending or borrowing. Loans are taken by individuals to buy homes, properties, vehicles, education or to fund businesses. Usually the borrowed money is repaid through periodic installments or through lump sum at a predetermined time.
The money repaid is higher than the money lent or deposited to compensate for the loan period.
How is simple interest calculated?
Simple interest is the interest charged on the principal amount lent or borrowed for a particular period of time. The interest is charged on the principal amount as a percentage of the amount.
Simple Interest = Principal * Interest rate * Time
For example, if the money lent was Rs 1,000 for a period of one year at a simple interest rate of 8%, then the interest payment will be 1000*8*1 which is equal to Rs 8,000.
What are the factors that influence interest rates?
Here are some of the factors that determine the interest rates
The term for the maturity of the investment
Government’s directive to the central bank