Personal finance: Why interest rates are different for different kinds of loans

When taking a loan there can be 2 ways if interests, a Simple interest (which can be calculated only on the principal amount of the loan) and a Compound interest (which can be calculated on the principal and on interest earned). So for the amount of loan that you have, you would have to calculate it by using the Simple interest formula. As for the interest that you earn, you would have to calculate it using the Compound interest formula. Consumers commonly take on loans to finance home purchases, education, debt consolidation and general living expenses. For the growing small business, loans are available for working capital, equipment, real estate, expansion, and inventory purposes. The most common consumer loans come in the form of installment loans. These types of loans are dispensed by a lender in one lump sum, and then paid back over time in what are usually monthly payments. The most popular consumer installment loan products are mortgages, student loans, auto loans and personal loans. In general, lenders use consumer’s credit score. Installment loans can come as either secured or unsecured. Secured loans are backed by collateral, meaning that the lender can seize the borrower’s collateralized asset if the loan isn’t paid back. Unsecured loans are not secured by collateral, and lenders have a more difficult time recouping their losses for these loans if a borrower defaults. In general, larger loans and specific purchase loans like mortgages and auto loans are secured.

And that’s it for my essay hope it was use full!! And thx for reading!

~AL