Different kinds of Loan Interest
Riba, or interest, refers to the additional amount paid on borrowed money or credit. There are different types of interest rates applied depending on the nature of the loan or financial agreement.
Below are the main types of interest:
Riba ya Moja kwa Moja (Simple Interest)
This is calculated only on the original amount (principal) of the loan. For example, if you borrow $1,000 at a 5% interest rate for one year, you’ll pay $50 in interest.
Riba ya Mzunguko (Compound Interest)
This is charged on both the principal and the accumulated interest from previous periods. It grows faster than simple interest because interest is calculated not just on the original amount but also on any previous interest.
Riba ya Kudumu (Fixed Interest)
In this type, the interest rate remains constant throughout the loan period. It provides predictability, as you know exactly how much you’ll be paying each month.
Riba ya Kigezo (Variable Interest)
Unlike fixed interest, variable interest rates fluctuate over time based on market conditions or other factors, which means your payments could go up or down during the loan period.
Riba ya Juu (Penalty Interest)
This occurs when borrowers fail to make payments on time. Penalty interest rates are usually higher and serve as a deterrent for late payments.
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