INTEREST CALCULATION A FLAT RATE - THIS IS THE METHOD BANKS USE IN THE GULF
Suppose you took a QR 100,000 loan today at a rate of interest of 10 per cent for five years. You are to pay back QR 20,000 of the principal and QR 10,000 (10 per cent of the loan) every year. So you pay back QR 30,000 every year. Over five years you pay back QR 150,000. But notice, that the loan kept reducing over the five years as you paid back QR 20,000 each year, yet you went on paying interest for five years, as if you had kept the QR 100,000 for the entire term.
INTEREST CALCULATION ON REDUCING BALANCE
What if you paid an interest ONLY ON the amount you owed each year and not the entire one QR 100,000?
The first year you would pay QR 10,000 as interest, the next year you would pay QR 8,000 on a reduced principal of QR 80,000 and so on, till the last year, you pay only QR 2,000 as interest. Now you would have paid back QR 130,000 instead of QR 150,000 as in the earlier case.
The first case is a situation of a loan that charges interest at a FLAT RATE (banks in the gulf) and the second case is when the interest is calculated on a ‘reducing balance’ or only on the amount of loan left to pay and not the entire loan amount. A flat 10 per cent is equal to a reducing balance at 6 per cent per annum.
You should get a range of options in reducing balance loans. You get annual, quarterly, monthly, weekly and now daily rests. A ‘rest’ is jargon to indicate when the bank will recalculate the EMI based on the amount of loan paid back. Suppose you have a loan with an annual ‘rest’ then, though you pay a monthly instalment, your benefit kicks in only at year end. Meaning the bank gets free interest for 11 months. A monthly ‘rest’ will recognise the reduction in the loan amount on a monthly basis and a daily ‘rest’ will do it each day.
Hope this is all clear now else just forget it and be content that you are getting a 3.99% interest loan - hehe :-)
INTEREST CALCULATION A FLAT RATE - THIS IS THE METHOD BANKS USE IN THE GULF
Suppose you took a QR 100,000 loan today at a rate of interest of 10 per cent for five years. You are to pay back QR 20,000 of the principal and QR 10,000 (10 per cent of the loan) every year. So you pay back QR 30,000 every year. Over five years you pay back QR 150,000. But notice, that the loan kept reducing over the five years as you paid back QR 20,000 each year, yet you went on paying interest for five years, as if you had kept the QR 100,000 for the entire term.
INTEREST CALCULATION ON REDUCING BALANCE
What if you paid an interest ONLY ON the amount you owed each year and not the entire one QR 100,000?
The first year you would pay QR 10,000 as interest, the next year you would pay QR 8,000 on a reduced principal of QR 80,000 and so on, till the last year, you pay only QR 2,000 as interest. Now you would have paid back QR 130,000 instead of QR 150,000 as in the earlier case.
The first case is a situation of a loan that charges interest at a FLAT RATE (banks in the gulf) and the second case is when the interest is calculated on a ‘reducing balance’ or only on the amount of loan left to pay and not the entire loan amount. A flat 10 per cent is equal to a reducing balance at 6 per cent per annum.
You should get a range of options in reducing balance loans. You get annual, quarterly, monthly, weekly and now daily rests. A ‘rest’ is jargon to indicate when the bank will recalculate the EMI based on the amount of loan paid back. Suppose you have a loan with an annual ‘rest’ then, though you pay a monthly instalment, your benefit kicks in only at year end. Meaning the bank gets free interest for 11 months. A monthly ‘rest’ will recognise the reduction in the loan amount on a monthly basis and a daily ‘rest’ will do it each day.
Hope this is all clear now else just forget it and be content that you are getting a 3.99% interest loan - hehe :-)