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Everything you need to know about Simple Interest
  • October 4, 2021
  • admin

Perhaps the only reason to invest money is to earn extra rates on the invested amount. By thinking about this requirement of people financial intermediaries and other investment companies used to bring into force two types of rate of interest. One is a simple rate of interest and the other is a compound rate.

Here we will discuss mainly on simple rate of interest. Whenever a person deposits money in his savings bank account then from the very first day he starts earning simple interest. Basically, people used to earn simple interest in every kind of investment plan as it is a very common rate related to return.

Even most of the direct lenders also offer a simple rate of interest while lending money. Generally, lenders who offer loans with less rate of interest then the borrower need not repay such a higher amount.  So, if you are looking for unsecured personal loans inIreland then choose a moneylender who offers a simple rate of interest.

What is simple interest?

It refers to a specific rate or amount of money which the bank or other investment account will pay an investor for investing money and on the other hand, a borrower needs to pay to the lender along with the borrowed money. There is nothing to confuse about the concept of simple interest. Actually, it is such a rate that can reflect its characteristic in two different ways.

When it comes to the matter of investment then things become different because a person who is an investor is investing money for a certain period. It causes multiple benefits to the financial organization and as a result to inspire the investor the entity offers an extra amount of money to the investor. The financial organization offers an extra amount of rate of interest to the investor in this case.

On the other hand, when a borrower borrows money from a moneylender then the moneylender himself is an investor here. He is investing money to fulfill the financial necessity of a person. Therefore, the borrower needs to pay an extra rate of interest to the lender for lending money.

In such a way, the usage of interest rates changes on the basis of its purpose.

Effects of simple rate of interest

There is no doubt that a simple interest rate can affect it differently on the basis of its purpose. Although the simple interest rate is always lower than the compound one even if a simple rate the payer needs to pay it punctually. Lack of interest payment can cause serious default.

So, a simple interest rate affects the financial stability of the borrower as well as the institution.

  • The extra cost of payment

While borrowing money from the direct lender, if the credit score and repayment history are all up to the mark then an only loan can be offered with simple interest. Generally, simple interest ratepayers are the fortunate borrowers. But there is no doubt that whether it is simple or compound interest, one must pay an extra amount to lenders.

  • As a lender one earns extra money

The situation completely reversed when a lender lends money. A moneylender needs to set a rate of interest by following the calculation technique of a simple rate. However, if he wants then he may choose accrued interest rate too.

After that, he needs to impose that rate and makes sure that the borrower agrees to repay as per the rate. In this case, the lender is also an investor earning extra money on his investment.

  • Depositor earns extra fund

There are many banks that offer several types of savings accounts. Some of them offer a high rate of interest and some of them do not offer any such extra money. However, when a person deposits money in his respective saving bank account then he gets extra money apart from the saved fund. Now, this is the outcome of the simple rate of interest that banks offer on deposited money.

So, these are three basic effects that are quite common for people who invest money or borrow money.

Usage of simple interest in different sectors

  • A simple interest in car finance

When a borrower borrows a loan then he needs to repay the outstanding amount monthly. Throughout the entire loan payment period, the entire amount is divided into two parts. One is interest and the other is principal.

The borrower needs to repay both at a time. A certain portion of the payment goes for principal and another portion goes to the interest part. Generally, financial intermediaries like banks and direct lenders offer simple interest for car finance. As a result, the borrower needs not repay a huge amount of loan.

  • Consumer Durables loan

Apart from purchasing high-value things, there are many more goods which come under the important list. Those goods are known as everyday usable. However, when a person purchases such an item then he wishes to pay the price with monthly installments.

In the case of consumer durables, lenders also offer a simple rate of interest because the price of the goods is not as high as others. Therefore, a borrower needs not to repay a huge extra amount. So, you can easily repay. But here is one thing that you must remember i.e. the repayment period should complete within one year.

However, instead of consumer durables loans, one can also borrow doorstep loans which you can get easily without wasting time.

  • CD investment

Whenever investors invest money in a Certificate of Deposit (CD) then they can earn a good amount of return. It is a low-risk investment option that typically financial intermediaries like banks offer to their account holders. However, if you invest a particular amount of money in CD then you will get the return after a specific date.

Usually, investors do not get a huge return on CD because the rate of interest applicable here is simple interest. Therefore, many investors do not like to invest in this investment instrument too. These are some practical usage of simple interest in various ways.

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