The interest rate is the amount charged as a percentage of the loan amount issued, which the borrower pays for the use of borrowed money per a certain time interval (day, week, month, year, etc.).
Usually, people come across with the annual interest rate, that is, the amount of the overpayment for the year of using the loan. But often people can meet the daily one. For example, any microfinance organization indicates a daily interest on a loan. But in fact, the interest rate on the loan is synonymous with annual interest rate.
What factors affect the amount of loan interest?
There are many factors affecting the amount of interest on a loan. But the primary one is the size of the so-called key rate. At the time of writing, it is set at 9%, but its value may change every quarter or even a month, or it may remain unchanged. It all depends on the economic situation in the country you live in.
The key rate tells us that not a single bank offers a lower annual interest. If you see offers of the bank with lower rates, then, probably, the financial institution has included a lot of other credit fees in such products, which bring the amount of actually paid interest to the average market level.
Since the bank grants exclusively borrowed funds on credit, the level of annual interest is affected by:
- current inflation rate;
- interest rate on interbank loans (banks may borrow from their business colleagues);
- interest expense to depositors.
But there are a number of other factors that to one degree or another affect the size of the assigned interest.
Types of interest rates
Depending on various factors, several types of rates are distinguished:
- Fixed. The fixed amount of loan interest charged by the agreement and does not depend on the economical situation and other criteria.
- Floating. It is subject to periodic review in connection with a change in the key rate, inflation rate and other events in the country’s economy.
- Postnumerando. Interest payments are withdrawn at the same time as the main debt at the end of the loan term. This type of annual rate is used in the case of consumer lending.
- Prenumerando. Here the situation is directly opposite to the previous one. All interest is charged at the time of the loan, and their rate is calculated based on the total debt.
- Current. The rate fixed on a certain date and valid only for those loans that are issued on that day. In a day, a week, a month completely different percentages per annum will be calculated.
- Forward. It is also fixed on a certain date, but is valid for all obligations executed after its establishment. This rate is valid until the day when its new rate is fixed.
- Regulated and unregulated. It depends on the influence of state structures on the size of the annual interest rate. Non-regulated types are more often present in commercial banks.
- Auction. These are the rates on loan agreements that were issued through a tender on the trading platform. Consequently, the auction procedures had a direct effect on their rate.
- Banking. The annual interest rate on loans issued to direct borrowers (companies and individuals). It is released directly by a financial institution.
- Rrock-bottom rate. It is based on the current analysis of the banking institution assets without taking into account market processes. Based on this indicator, rates are calculated for each interest period.
- Effective. It is a nominal rate adjusted for price fluctuations.