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Calculating APR For Compound Interest

According to workers in the banking industry one major force that has influenced the industry is compound interest which has brought good returns to people who are bold enough to invest and also to banking and lending institutions. On the other hand most of the people borrowing money from different financial institutions have encountered the term APR, standing for annual percentage rate, where most people do not understand the how to calculate the ratio. Lending institutions have noted an increase in number of individuals seeking loans to either purchase a home or a car. When one is seeking to acquire a credit card from a bank or lending institution it is advisable that they compare the interest that a card will attract to ensure one does not incur huge interest charges where one can compare the APRs from the different institutions. Annual percentage rate, APR, is defined as the amount of money that one pays interest annually to the lending institution depending on their outstanding balance.

The two most common types of interests charged by the lending institutions are variable and fixed interests though some institutions have other rates. If according to the loan agreement the borrower is paying the loan in a fixed interest rate, they pay the same amount in every installment throughout the repayment period but if the borrower and the lender agreed to variable interest rates the value of installments may either increase or decrease during the repayment period. One needs to be keen on signing any loan agreement and discuss all areas affecting the amount they pay to the lending institution as interest. Lending institutions are bound to present the borrowers with all the figures and facts concerning their loan agreement to enable them to make informed decisions. When discussing the loan agreement the borrower should also seek verification on added fees such as payment insurance protection fee as the fees are optional with some institutions. Other areas needing to be discussed before one signs the loan agreement include the loan repayment period length and the mode of payment. Policies have been formulated by different regulatory bodies to protecting the borrowers from overexploitation by the lending institutions.

If one is interested in determining the amount they pay in a month as APR charges, they multiply the outstanding balance of the loan with the set rate and divide the figure with 12 which is the amounts of a month in a year. Taking an instance where a bank has set their rates at 12 percent , and one has an outstanding balance of 1000, to determine the value that one pays in the month one multiplies the rate with outstanding balance, which results to 120, which is divided with 12, meaning the client pays at a monthly rate of one percent and during the month they paid 10 shillings as interest.Resources Tips for The Average Joe

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