Two Forms of Interest Rate

by Gil on November 26, 2011

What is interest? Interest is the amount of money paid by the borrower to the lender as a form of fee for the use of asset or money. For example, you apply for a housing loan to a bank for the construction of your house. You will get a lump sum amount of money from the bank and then you might pay it for several years plus the interest that will be added to the principle.

I assume you probably heard many times the word “5-6” during discussion about lending or borrowing of money from some people who do that kind of activity. When I was a child, I heard it most of the time from my neighbors and relatives who operated their own business. I think many business owners resolve to “5-6” when borrowing money for their business venture since majority of small businesses don’t have the access to bank loans and other micro-financial lending.

Two Forms of Interest Rate

Every time you apply for a loan, there is a corresponding interest that you should pay plus the principal amount. Commonly, loan payment may take several months or years depending on the amount of loan and the term agreed upon by lender and borrower. In case of our example about “5-6”, the interest rates is very high compared with bank loans. The interest rate is 20% of the principal amount. It is the reason it’s called that way because for every 5 pesos you owed, you should pay back 6 pesos. In my opinion, this type of borrowing is the worst kind for borrowers.

Basically, there are two forms of interest that you should know and I will discuss it later their differences. Interest rate can be lending and borrowing interest rate. Lending interest rate is the rate used by lenders in determining how much a borrower should pay for a particular amount borrowed. Normally, lending rate is set by bank, lending companies or micro lending institutions who lend money to borrowers. Most of the time, lending and borrowing interest rate should be the same as reflected on website of banks that offer loans to its customers.

How Much Interest Rate you Should Pay?

Interest rate varies depending on the term of the loan and which bank will you get it. Thus, it is very essential to shop for the lowest interest as possible when you want to borrow money from banks or lending companies. Make sure you know the final or exact interest that you’re going to pay plus the fees that will be charged to your application.

 

Photo Credit: jscreationzs

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