Periodic Interest Rate

What is periodic rate?

The periodic rate is the interest rate charged over a certain number of time spans. The periodic rate equals the annual interest rate separated by the number of periods. For instance, the interest on a home loan is typically calculated month to month, so on the off chance that the annual interest rate is 4 percent, you partition that by 12 and get 0.33 percent. That is your interest consistently.

More profound definition

At the point when a bank charges periodic interest in light of the average balance of a loan on a month to month or daily basis, the effective interest rate is really higher than the stated annual interest rate. The explanation is the effect of compounding interest.
With credit cards and overdrafts, the interest is regularly calculated consistently; this means the daily interest rate is the annual rate partitioned by 365 days. Since interest is calculated daily, a large daily balance on the account means you will pay more interest.
The effect of the periodic rate is exacerbated when interest rates are high. For instance, on the off chance that the variable interest rate on a credit card is 16 percent, the daily interest rate would be 0.044 percent.
The effect of the periodic rate can likewise be utilized to your advantage when you invest money, as long as you reinvest the interest or profits. Along these lines, you compound the interest, and north of several years the total value of the investment will be greater than if you had taken the interest or profits out every month.

Periodic rate model

Organizations in some cases experience issues overseeing cash flow since they pay for raw materials however don't recuperate that cost until the goods are sold. To guarantee they meet their financial commitments, many utilize a loan or overdraft facility.
Interest on their loan is charged consistently, so in the event that they draw down a large amount to pay for a big order and repay it a couple of days after the fact, they might wind up paying more interest than they expect, even in the event that their average loan balance is low.

Highlights

• Credit card lenders normally compute interest in view of a daily periodic rate so the interest rate is duplicated by the amount the borrower owes toward the finish of every day.
• Interest on mortgages as a rule compounds month to month.
• Lenders ordinarily quote interest rates on an annual basis, yet the interest compounds more much of the time than annually generally speaking.