This article will give you an indication of the factors you would need to consider when understanding the interest on your loan during repayment.
- What is the interest calculation?
- The two types of interest we charge: Compound and Simple Interest
- Compound Interest
- Simple Interest
What is the interest calculation?
The interest rate is made up of two components: a fixed margin and a base rate
- The fixed margin is a simple percentage between 5.0% and 9.0%. This amount is provided to you in your Loan Agreement as is dependent on the variables provided in your application.
- The base rate is a floating rate that is determined by a leading financial institution and will change throughout the life of your loan. We currently use the 3- month LIBOR as the base rate for the currency of your loan. Prodigy Finance has no influence on this rate.
The two types of interest we charge: Compound and Simple Interest
Prodigy Finance has two types of interest that are applied to our loans: compound interest and simple interest.
Depending on the agreement applicable to your loan, interest will be calculated as either one of the below:
Compound interest is the addition of interest to the principal sum of a loan or deposit. This means that interest is charged based on the outstanding balance every billing cycle.
- Interest = outstanding balance (margin rate + LIBOR)/12
Simple interest is calculated daily and charged monthly, on the principal balance only.
With simple interest loans, the interest charged during grace is capitalized on the first day of the cycle that the borrower enters repayment.
Capitalization is when the total interest accrued during the grace period is summed and then added to the outstanding balance to create a new principal balance.
The formula for simple interest is:
- Outstanding principal balance x (margin + base) /365 x the days since your last transaction or days in the monthly cycle