I am sure most of us has our fair share of applying for loans, right? Be it a payday loan or an emergency loan, most of the lenders requires us to repay it with an agreed interest. Unless, you borrow it from a friend or a family member which does not require you to add some amount when repaying it. In a typical case, an amount added to the principal is necessary in a lending perspective.
So, what do we mean exactly by interest rate, a lot of internet resource defined it a broader perspective but i love how they made it clearer here:
Investopedia defines it as “The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset’s use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”.”
Read more: http://www.investopedia.com/terms/i/interestrate.asp#ixzz28xC25Rbs
The definition below is much clearer than how i read it with other finance portals and the computation follows:
Simple Interest = P (principal) x I (annual interest rate) x N (years)
That is how a simple interest is computed for a principal amount borrowed. While other lenders applied for compound interest which has a different computations. Meanwhile, local folks have different versions of their lending policy and so as the interest rate applied but in one way or the other, it’s about an agreed add on amount from the principal that is always a prime consideration when considering a loan.
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