Full What Is Interest Rate Guide for Forex Trader
The interest rate was introduced as a tool that allows you to get paid for submitting your funds for other parties’ usage. Interest rates were introduced in Ancient Greece and sometimes were represented as natural goods, not money. For example, those who took grain had to return more grain.
In any case, throughout the years, the interest rate was assumed to be something negative, so banks and lending organizations, as we know them now, became widespread and completely legal in the recent past. Today, taking out a loan is quite easy, and almost everyone has taken out a loan, at least once, so it is important to know more about the essence of the interest rate, as well as the different types.
What Is Interest Rate?
The interest rate can be called payment for receiving a loan. When you take out a loan, you need to return the total loan amount, plus interest rate, which is derived from the amount owed. For example, if you take a $100 loan and a 7% interest rate, you need to return the $100 principal and $7 in interest.
It all comes down to interest rates. As an investor, all you're doing is putting up a lump-sum payment for future cash flow. Ray Dalio, billionaire investor, hedge fund manager, and philanthropist.
When Are Interest Rates Applied?
The interest rate is applied when you lend assets - fiat, crypto, etc. No matter whether you are an individual or act as an entity, the interest rate can be applied when you borrow funds. The interest rate can rise or decrease - it all depends on the terms of the loan.
How Is The Interest Rate Calculated?
There are different types of interest rates, and thus each type is calculated differently. Regardless of what interest rate amount is applied, it can always be represented in an equation. We will disclose below how to calculate simple and compound interest rates.
How to Calculate Simple Interest Rate
A simple interest rate is a basic type of interest rate. It considers that you need to repay a principal plus interest only. For example, when you take out a $100 loan, with a simple interest rate of 5% applied, you need to repay $105 in total.
However, usually, when you take out a loan, there is a specified term for which the interest rate is applied and payment periods. Usually, the interest rate is applied per annum, and the payment period is applied on a monthly basis. Thus, if you take $100 for three years, and a simple interest rate makes 5% per annum, you have to repay:
$100*(5%*3+100%) = $115
We take $100 as principal, multiply 3 by 5% as there are three years for the loan usage with a 5% interest rate per annum.
Your monthly payment will be:
We take the whole sum to repay, which totals $115, and divide it by the number of months in 3 years, which equals 36. Thus, you need to pay $3.19 if you take out a loan under the terms described above.
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