Explain the factors that affect the cost of a loan: a. Prime rate. b. Fixed-rate loan. c. Variable-rate loan. d. Maturity e. The effective rate of interest f. Compensating balance. g. Compounding.
Explain the factors that affect the cost of a loan:
a. Prime rate.
b. Fixed-rate loan.
c. Variable-rate loan.
d. Maturity
e. The effective rate of interest
f. Compensating balance.
g. Compounding.
a. Prime Rate
Rate of interest which is charged by the bank to their most trustworthy customers is known as prime rate.
Since these customers have high credit ratings and they make payments of all the installments on time,
therefore banks give them loan at cheaper rates to maintain the healthy relationship with them.
Prime rate is determined on the basis of federal fund rate which is set up by the federal open market committee.
Prime rates are generally lower than market prevailing rates, thus makes cost of loan cheaper to the customers.
b. Fixed rate loan
These are the loans which bears fixed rate of interest and do not change as per the market fluctuations.
Generally these types of loans are taken by those customers who see rise in rate of interest in future, therefore to protect themselves from the rise in interest rate they take loan at fixed rate.
This rate ensures them stability in interest payments over a period of time.
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