What is finance rate
This can also be referred to as interest rate. The finance rate is the amount charged on the money borrowed by the borrower from the lender. This is usually expressed in percentage of the principal provided by the lender. The assets of the lender are used by the lender and this assets being used have interest rate on it. The assets given out by the lenders can be in form of house, cars, trailers, cash or even consumer goods. The interest rate is usually considered as the rate of return for the lender while it is the cost or rate of debt for the borrower.
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The finance rate is usually charged base on the risk if it is high or low. If the risk is high, the interest rate charged on the asset is usually high while the finance rate is low when there is lower risk on the asset. The assets with lower risk are usually in form of cash or consumer goods while the assets with higher risk are usually cars or buildings, land, trucks, machinery, etc.
These high risk assets are usually a fix asset. The finance rate is the amount on the cash of the principal. The assets like buildings, cars or any other vehicles which are usually given out by the lender or dealer or agents depending on the type of assets involve has its interest rate to be called lease rate while interest on cash or consumer goods which are usually with lower risk has their interest rate to be called simple interest.
Many individual borrow money or assets for many reasons either for personal finance or corporate finance. In personal finance, money can be borrowed for the purpose of paying school fees, buying of properties, taking care of homes, for feeding or any other things while the corporate finance can borrow money for running the affair of the corporation. The money borrowed are usually paid back with a certain amount of money for borrowing the money at the end of the agreed period or the maturity time.
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The additional money paid on the principal is referred to as finance rate. If there is an interest rate of 20% on $35,000 which was borrowed, to get the amount to be paid back to the lender, divide the interest by 100 and multiply it with the principal. The total got is added to the principal. The amount got is the amount to be paid. E.g. 20/100 * $35,000 = $7,000. This $7,000 is added to the $35,000 which makes the total to be $42,000. The amount to be paid back is $42,000 which has the combination of the interest and principal. There are two basic types of finance rate which are the simple interest rate and the compound interest rate.
In the simple interest which is calculated above has the amount of the interest calculated for the number years the loan is to end to get the amount to be paid. If the loan is to last for 5 years, the calculation us made by this simple method. The principal of the money above which is $35,000 is multiplied by the number of years and the interest rate, all divided by 100. This gives the simple interest. That is S.I = principal * interest rate * time. So the interest on the above example is 35,000 * 20 * 5 = 3,500,000/100 = $35,000. The $35,000 is the interest to be paid back after the 5 years.
Compound interest: In the compound interest, things get complicated, as the interest to be collected is way higher than the one of the simple interest. The simple method for the calculation [(1+ (interest rate) ^n) – 1 * principal.
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Cost of debt.
This usually represent the interest rate on the part of the borrower just as the return income rate is on the part of the lender. Since most companies’ g into debt financing or equity financing, they compare the cost of debt to the cost of equity to check for the o e that is favourable before starting the financing of the company. The cost of equity I’m equity financing is the dividends while the cost of debt in debt financing is the interest rate which is usually referred to as coupon rate.
