**Pogrebniak
D. O.**

**PhD
Zhukova O. S.**

**PhD
Petrachkova O. L**

*Donetsk
State University of Management*

** ****CREDIT**

Depending upon the
amount of money borrowed, interest can become a significant cost. The borrower
should be familiar with the commonly used methods of calculating interest. The three principal methods are:

1) flat interest rate,

2) interest on the unpaid balance, and

3) discount method .

With the flat interest rate
method, a specified rate of interest is paid on the original amount of the
loan.

Interest may also be charged
on the unpaid balance. In this case, interest is paid only on the amount owed.

With the discount method,
interest is deducted in advance. Assume $500 is borrowed to be repaid in one
year. If the lender discounts the loan in advance at 8 per cent, he will make
the loan for $40.00 interest will be paid.

Often loans are amortized.
That is, the interest and principal payment are repaid in such a way that there
is an equal payment each month or each year. When this method is used, the
interest payment is high in the early year of the loan and method is used, the
interest payment is high in the early of the loan and then declines. The
principal payment, on the other hand, is low in the early years of the loan and
then declines. The principal payment, on the other hand, is low in the early
years of the loan and then it increases. The term «amortization» is also used
to refer to loans which have equal principal payments. The periodic interest
payments are based on the unpaid balance. Under this plan the principal payment
is the same each period but the amount of interest and, hence, the total
payment declines. The type of repayment plan is common in the farm mortgage
field and is preferred by some lenders to the type of amortized repayment
plan. With short or intermediate credit
it is advisable to be in a flexible position. Therefore, one of two conditions
is desirable: (1) either the loan should be written for a long enough period of
time; or (2) the borrower should be assured the lender is willing to make as
extension if one becomes necessary. Many commercial bankers like to make loans
for relatively short periods. They may do this knowing the loan will not be
repaid in full when it falls due. When
the loan comes due, they have an opportunity to review the loan with the
borrower. Such practices, however, can lead to financial troubles for the
burrower and can decrease the efficiency of his operation if the loan
called.

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5. Kornai I. : The Road to a free Economy

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