Would you like to orientate yourself in the theory of lending? Are you interested in how the loan interest is calculated and what influences the interest rate?
You do well, because before signing any contract you should be 100% sure that you understand everything you sign with your signature.
Be clear about terminology
It is often not easy to understand financial terminology. If you want to be clear about the interest calculation or the interest rate calculation, you should learn to distinguish these two terms.
What is the interest rate?
The interest rate is the price of the loan expressed as a percentage and informs you how much the loan amount will increase over a certain period . There are different types of interest rates .
The first criterion is the value of the money borrowed:
- Nominal – the credit rate you normally find in the contract. However, it does not include inflation.
- Real – reflects the true value of the money borrowed. Compared to the nominal interest rate, it also takes into account the inflation rate (a decrease in the purchasing power of money).
Furthermore, we can divide interest rates in terms of their changes during the loan:
- Fixed – the rate does not change over the set period (in the financial sphere you often encounter the phrase “fix for three years”).
- Variable – may vary according to current market conditions. To calculate the interest rate, individual institutions take into account the Good Finance (current rate on the interbank market) and their own rate (in the case of the Mortgage Loan the GFI Money as rate).
What is loan interest?
Loan interest is a specific amount of money that you actually pay to a bank or other non-banking institution in addition to the amount borrowed (principal).
Interest is calculated according to the following formula:
principal x interest rate x number of days
Interest = ——————————————–
What influences the interest rate?
- Loan amount – each lender has this factor set differently and it cannot be unambiguously stated whether a higher loan is more expensive or vice versa. For comparison, it is easiest to use the company’s credit calculator.
- Duration of repayment – the longer the repayment period, the higher the interest rate. A creditor who has tied funds in a given loan at all times runs the risk of default.
- The creditworthiness of the borrower – banks and other lenders often take into account your payment discipline (whether you pay in time, what your income is, etc.), but that does not expect you with the mortgage loan.
- Economic factors – mainly inflation and central bank interest rates.