In daily life, almost every one of us has dealt with banks, whether it is deposits, loans or financial management, they are inseparable from one key word - "interest". However, how exactly is bank interest calculated? This article will reveal this seemingly complex but regular financial knowledge for you in simple language.
First of all, we should make it clear that bank interest is mainly divided into two categories: deposit interest and loan interest.
Deposit interest calculation
When you deposit funds with the bank, the bank will pay you the corresponding interest at the agreed interest rate. The formula for calculating the interest on a deposit is generally as follows:
Deposit Interest = Deposit Amount x Annual Interest Rate x Deposit Term (years) 100
For example, if you deposit $100,000 in a bank with an annual interest rate of 2% and a tenor of one year, then the interest you will receive on the deposit is $100,000 x 2% x 1 = $2,000.
It is worth noting here that there are usually two types of interest calculation methods in banks: simple interest and compound interest. Simple interest means that during the deposit period, interest is calculated only on the principal; Compound interest, on the other hand, is to add the interest that has been generated to the principal and then calculate the interest for the next period, which is what we often call "rolling interest".
Loan interest calculation
Conversely, when you borrow money from a bank, you need to pay interest on the loan. The calculation of loan interest is relatively complex, and usually involves a variety of repayment methods such as monthly payment, equal principal and interest, and equal principal.
For example, the most common method of equal principal and interest repayment is a fixed monthly repayment that includes part of the principal and the interest payable for the month. The formula is more complicated, but the simplified understanding is:
Monthly repayment amount = [Loan principal x monthly interest rate x (1+monthly interest rate) Number of repayment months] [(1+monthly interest rate) Number of repayment months - 1].
For example, if you borrow $1,000,000 from a bank, the interest rate is 48%, the loan term is 20 years (i.e. 240 months), then you need to calculate the monthly repayment according to the above formula, which includes the decreasing principal amount and the interest that varies month by month.
The calculation of bank interest is based on certain mathematical models and financial rules, and understanding and mastering these basic principles can not only help us better manage our personal finances, but also make more informed choices in investment decisions. Whether you want to earn extra income through deposits or cash flow through loans, you need to have a clear understanding of how bank interest is calculated. Hopefully, this article will help you demystify bank interest calculations and make you more relaxed on the road to wealth management.