Interest Cost
What Is Interest Cost?
Interest cost is the cumulative amount of interest a borrower pays on a debt obligation over the life of the borrowing. Interest is paid on the debt notwithstanding repayment of principal. In any case, any negative points or rebates a lender pays to a borrower ought to be deducted from the interest cost as they are in effect a refund of future interest. In consumer mortgage loans, this amount ought to incorporate any points paid to reduce the interest rate on a loan, since points are in effect prepaid interest.
Understanding Interest Cost
Interest cost is one measure of a loan's economics or internal rate of return. Nonetheless, different measures —, for example, lender fees and upfront costs including loan closing costs, tax benefits and outcomes, principal reduction and opportunity costs as re-venture rates — ought to likewise be remembered for a careful analysis of the loan decisions.
Interest cost becomes possibly the most important factor in an assortment of consumer financial obligations including mortgage, student and vehicle loans, and credit cards. Interest cost is additionally an important consideration for corporate borrowings, for example, commercial paper, revolving lines of credit and long-term bank loans, bonds, and lease costs are likewise particularly impacted by interest cost. Banks likewise bring about interest costs when they credit investors' interest on their bank accounts.
Special Considerations
Interest cost might be quoted as a annual percentage rate (APR). Yet, to have an accurate comprehension of your financial obligation, it is important to comprehend how lenders ascertain the interest that aggregates on your loan. Interest could accrue on a daily or month to month, or quarterly basis. Moreover, a few lenders offer loans for which the interest cost isn't payable for an initial period yet rather is added to the outstanding amount the borrower owes.
Interest cost might be fixed to a reference security, like the 10-year U.S. Treasury bond, for the life of the loan or floating (likewise called a variable). The interest cost on debt with rates that change periodically is tied by a formula to an interest rate benchmark, like the London Interbank Offered Rate (LIBOR).
For debt with variable interest rates, lenders frequently incorporate provisions that give some measure of protection from extreme changes in interest costs by offering interest rate covers. These normally likewise contain floors, to guarantee the lender a base acceptable rate of interest.
Interest Cost versus Taxes
Certain types of interest costs are dealt with well for tax purposes in several purviews. These remember interest payments for home mortgage debt and student loan interest payments (both are subject to limitations and avoidances), and for corporations, interest payments on debts like loans and bonds.
Features
- Interest cost is the amount of interest a borrower pays over the life of the debt.
- Interest costs are just a single factor in a loan analysis, different interesting points incorporate opportunity costs, tax benefits, and closing costs, among others.
- Negative points and rebates ought to be deducted from interest costs.
- Certain types of interest can have tax benefits, for example, mortgage and student loan interest.
