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How Loan Interests are Calculated?

Interest is basically the cost of using money of somebody. This is the amount you pay on top of the principal amount you have borrowed. If you are lending money, you are earning interests. There are multiple ways of calculating interests actually. Some of the methods used benefit the lenders and some are the borrowers.

The decision of paying interests will depend on what you would get in return.

On the other hand, the decision of earning interests will fall on available alternative options to invest your money on.

However, this is a vague explanation about interests and personal loans like on Zebra loans. Let’s dive in further about this subject.

Understanding what Interests are

Interest is computed as percentage of the loan or deposit balance that has to be paid back to the lender periodically. This is in exchange to the privilege of borrowing and using their money. Then, the amount is typically quoted as annual fee but, the interests could be calculated for periods that are either shorter or longer than 12 months.

There are two instances in which interests can be calculated.

Borrowing

To be able to borrow money, you have to repay what you’ve borrowed. Not only that, in an effort to compensate the lender for risks of lending to you, you have to pay more than what you initially borrowed.

Lending

Say that you have spare cash, you may lend it to yourself or perhaps, deposit the funds into a savings account. In exchange, you can expect it to accumulate interest. If you’re not going earn anything, then this may just tempt you to spend it as there’s little to no benefit to waiting.

How much You Earn or Pay for the Interests?

As a matter of fact, the answer to this question will depend on a number of factors. This includes:

  • The rate of interest
  • The amount of loan you have initially borrowed and;
  • The duration it takes to have the loan repaid

Just bear in mind that with a longer term of loan, it is oftentimes associated with higher rates of interest. So, if you don’t like the idea of paying higher interests but need cash as soon as possible, then think of both the benefits and drawbacks. Decide which will bring you the most benefit. However, be open to the fact that sometimes, you just have no option but to follow what the lender implemented.

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