System effective interest is the opposite of flat rate system, which is calculated based on the interest portion of principal remaining. So that the portion of interest and principal in installments every month will be different, although the amount of installment per month remains the same. System effective interest is usually applied to long-term loans such as mortgages or investment loans.
In this system the effective interest, the portion of interest in the early days of credit will be huge in regards monthly installments, so the principal debt will be very slightly reduced. If we want to make early repayment of the principal amount of the debt will still be very large even though we felt he had to pay installments if seem large enough.
If you compare the two systems of interest, then each has advantages and disadvantages. Excess flat rate system is that if we want an early redemption, the principal portion of debt is reduced quite comparable with the amount of money we have gradually. But its weakness, it was quite a big interest because they are calculated from the initial principal.
System effective interest would be more useful for long-term loans that are not settled quickly in the middle of the road, because if we compare the nominal interest that we pay, far less than the flat rate system.
Based on my rough calculations, the resulting calculation of nominal flat rate estimated at almost twice the effective interest rate, such loans with 5% flat rate is approximately equal to the credit of 10% effective interest.
Incoming search terms for the article:
- nominal flat rate effective interest rate formula
Comments are closed.