Introduction
Interest is the cost of borrowing money. When someone lends money to a person, he wants to get compensated for it. This compensation is done in the form of interest rate. This interest is paid on big loans as well as on small credits. The interest can be taken as the opportunity cost. Here, a question arises that how to compute the interest credit? For calculating interest credit, several factors are to be considered. Let’s discuss each of them.
Factor of Risk:
Risk is the very main factor that determines the interest credit. Risk can be of any type. A person may not pay the interest on time or he may not pay the loan back, these are the major concerns of the risk. Instead of lending money, a person may invest it somewhere else and can earn more as compared to the interest on lent money. This is the risk for the money lender. So for compensation of every type of risk, all the risk factors should be considered in the calculation of the interest credit. The higher the risk, higher will be the interest rate.
Detail
Security against the loan:
For having interest credit at a lower rate, it is good to put something as collateral. Secured loans are easy to obtain and the security is considered while computing the interest credit. Secured loan charge low interest rate as the money lender can compensate by using the collateral.
Credit history:
Person’s credit history is one of the factors that use in computing the interest credit. Maintain a good credit record and scores that the lender will lower the interest rate. Good credit scores can get a person’s lower interest on the credit.
Features
Demand and supply of money:
Demand and supply of money is considered while computing the interest credit. If the financial authorities need to increase the supply of money in the market, they lower the interest rate where as when the authorities need to decrease the supply of the money, they increase the interest rate. This factor is very crucial and is seriously considered while computing the interest on credit. The demand for liquidity determines the supply and demand of the money.
Monetary policy, market and economic conditions of the country:
The monetary policies of the country, the economic conditions prevailing in the country and the ongoing economic conditions are very important factors in computing the interest rate.
Comments
Person’s profession and source of income:
For the computation of the interest credit, credit seeker’s profession, his source of income and the purpose for which the loan is required. If the person is related to any profession where income is not guaranteed like in a profession where commissions are used as a form of compensation, then the interest rate will be higher.
All the above mentioned factors are considered while computing the interest rate. Each of these factors contributes towards the determination of the interest. Low risk credit or loan is subject to lower interest payment. The secured the loan is, lower will be the interest on it.
