Don’t Trust the Quoted Rate - three examples I need concepts of Borrowing from a bank:...

Don’t Trust the Quoted Rate - three examples

I need concepts of

Borrowing from a bank:

Montly versus Annual Interest

an Interest Free Loan

Expert Solution

Borrowing from a bank is the process of getting funds for your personal or business requirement. As an individual there are different types of bank borrowings e.g education loan, home loan, car loan, personal loan, mortgage loan etc. Then there is business loan for carrying out business activites. All the borrowings from bank bear a Rate of Interest at which funds are lent to you and the repayment of the borrowing has to be done on Equated Monthly Instalments or Instalments (frequency may be monthly, quarterly or annually as per loan covenants).

E.g I am a government employee with fixed monthly incoem of Rs 70,000/- I need to purchase flat for Rs 45 lacs. I can borrow from bank at ROI of 8% with repayment period of 300 (present age 26) and EMI of Rs 32000/-. Thus I will be able to build an asset for myself and my family by borrowing and repaying systematically from a bank.

2.

Monthly Interest	Annual Interest
Here bank borrowing is repaid in Rate of Interest compunded monthly to Equated Monthly Interest	Here bank borrowing is repaid with annual compunding of ROI.
This may also mean the applicable ROI for bank borrowing is monthly rat of interest	Annual rate of interest
E.g Business loans have monthly ROI also.	E.g home loans generaly have annual ROI

3. An interest free loan is not a loan but an advance which you take back in pre decided instalments. There is no interest component to this loan and thus you only repay the principle amount you have borrowed. There is no profit for the lender in such loans since there is no value addition to the loan amount.

E.g many company's give their employee an interest free loan cum advance beggining of each financial year whcih are then systematiclly deducted from their salaries and the loan gets repaid by the end of that financial year.

jeff jeffy answered 2 years ago

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