Wednesday, 31 October 2012

Cycle of interest rates in banks:

The first preference of an investor or a depositor is the final yield he gets on maturity of his principal amount. The banks, like several other financial agencies, also permit overdraft to its depositors against their investment besides several other modes of borrowings. In most of the cases, the borrowers are unaware of the impact of interest that is charged from them, say for instance it is quoted as 12%, whereas it is much more when calculated in terms of compounding interest, as the bankers do. It is okay if the interest is charged in a simple manner annually, there is no compounding. But if it is charged with rests, say monthly, quarterly or six monthly, the interest rate grows much higher as a result of charging interest on the interest already charged earlier. In longer terms, the overall principal amount grows to two times or even three times on account of interest having been charged on compounding basis. It is for the borrowers to carefully go through this sort of an interest and think twice before going for a loan. Interest on compounding basis is quite in the interest of the investors and depositors, but in the case of borrowers it is a great pinch for them.

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