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:
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.
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.
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.
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.
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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