How do you calculate your interest rates?

How do banks calculate interest rates?

• Answer:

  Interest is a fee paid to borrow money. If you borrow money from the bank, you pay the bank interest on your loan. If you deposit money in a bank savings account or certificate of deposit, the bank pays you interest for the use of your money. Banks use a formula to calculate interest rates.Interest on LoansWhen you borrow money from a bank, perhaps to buy a car or a home, you make regular payments to your bank that include interest and principal payments. Banks use a standard formula for computing your interest: Interest = Principal x Rate x Time.Calculating Interest on a LoanYour bank lends you money at an annual interest rate. You probably make monthly payments on your loan. If you borrowed $1,000 at 6 percent, you would owe $5 interest the first month ($1,000 principal x 0.06 interest rate x 1/12 of a year).Balance ReductionPart of your monthly payment reduces your balance, so that the balance you owe interest on is slightly less each month.AmortizationThe gradual reduction of your loan balance through regular interest and principal payments is called "amortization." The bank uses an amortization calculator to determine the amount of your monthly payment so that each payment is the same amount.Interest on Savings Accounts and CDsInterest you earn on deposits is calculated using the same interest formula, but it is done according to a "compounding" schedule, which typically is daily, monthly, quarterly or annually. Compounding refers to the frequency with which the bank calculates your interest. The interest is then added to your balance, so that the balance you earn interest on is slightly bigger each compounding period.Source:http://www.alphainvestmentopportunities.com/cgi-bin/finance101article.cgi?article=InterestRatesandCompoundingMore Information:http://www.vertex42.com/Calculators/loan-amortization-calculator.htmlhttp://cdrates.bankaholic.com/cd-interest-rate-calculator/http://www.finaid.org/calculators/compoundinterest.phtml