Pogrebniak D. O.

PhD Zhukova O. S.

PhD Petrachkova O. L

Donetsk State University of Management


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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