Credit gives the word to pay either by repaying it or returning those resources later. In other words, this credit is the method of making the reciprocity formal, legally enforceable, and of course, extensible to a vast group of people who are not related.
However, the resources provided may be financial or have goods or services, like consumer credit. The credit covers any form of deferred payment. Credit generally gets extended by the creditor, the debtor or lender, and sometimes the borrower.
When one party grants a loan to the other, they do so on the condition that the loan will be returned with an added interest levied on the total amount. Hence, the interest is like a charge imposed on the amount granted as a loan.
Now, the rate of interest that is charged on loans varies from one financial institution to another. Here, a fixed rate of interest refers to an interest rate that is likely to remain unchanged for a specific term. A fixed rate of interest can be imposed on liabilities or obligations such as loans and mortgages. In some instances, mortgages can have a fixed rate of interest for a specific part of their term and a flexible rate of interest for the rest of the term.
The rate of interest is nothing but a way of calculating the total interest that should be levied on any loan or mortgage. It may also be known as theflat rate.
Calculation of a fixed rate of interest:A fixed rate of interest is essentially a calculation based on which loans may be granted by financial institutions. It is determined by taking into consideration the actual amount of money borrowed, the time period the loan is borrowed for, and the agreement entered into by the parties.
Fixed rate vs Floating rate: As already discussed, a fixed rate of interest is an unfluctuating rate at which interest is imposed on a loan. Now, a floating rate of interest refers to a rate that is subject to retrospection on a quarterly basis. It should also be noted that when it comes to loans having a floating rate of interest, the lending party cannot impose penalties for any prepayment of premiums.
Determining whether to select a fixed rate or a floating rate entirely depends on what the borrowing party is comfortable with. If the prevailing fixed rate seems agreeable to you, then the fixed rate of interest would be the way to go. This is because a floating rate may increase in the future which may prove to be a loss on your part.
