Wednesday, May 17, 2006

Know Your Interest Rates

Hi,
I learned a interesting and important fact , that could be used in day to day life. There are hundreds of interest rates and if you are not cautious enough you will be in a wrong belief that your bank is charging you the best interest rate.

Sample this.

Money flow.
You take 500 units now and pay 600 after a year later.

It can be seen as you take a loan of 600 now, bank pays you after deducting the interest . So interest rates become 16.67 percent.
Another way is you take a loan of 500 and pay 600 a year later. 50 interest on 500 means an interest on 25 percent.

In case of normal emi . If you take loan today of 500 and pay in installments. Do not add up all installments to the end. Since this will make you feel you paid after the time period where as you have paid throughout the period. So the interest rate you think you are paying is almost half of wht it is actually is.

Make a benchmark to compare the interest rate of all banks. General is to calculate emis on monthly rest etc and calculate effective rate for the whole year.
More or less dont get confused with the schemes that confuse you like pay one installment early and in advance. Discounting given on loans is also a confusing factor.

Corporates follow a simple rule... if you cant sell your product confuse investor.

Beware.

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