The interest rate can be approached from two points of view, from the perspective of the investor and from the perspective of the applicant of a loan.
- For the investor, the interest rate is the benefit that he obtains for an investment or for lending his money during a certain time in the case of crowdlending investors, and during which he can not enjoy it.
- For the applicant of a loan, the interest rate is the cost that implies the granting of a loan.
The economic terms related to finance, often, involve confusion and lack of understanding, since they usually carry an associated complexity. The interest rate covers a wide range of concepts, so we have made this guide useful for you to know everything related to the interest rate. We start!
What is the interest rate?
The interest rate can be defined in general terms, such as the compensation received for the use of a unit of capital during a specific period of time. To fully understand the definition of the interest rate we must take into account the main variables that constitute it, time and money. It is common knowledge that money loses value over time and the interest rate is the index that compensates for this variation in value.
Therefore, the interest rate refers to the price of money that compensates the depreciation of value that it suffers from the passage of time and can be understood, as we said in the introduction, on the side of the investor or on the side of the person or company requesting financing.
Types of interest rates
As we have already mentioned, one of the main reasons that lead to the confusion of the interest rate term is all existing varieties that refer to different concepts. We explain them to you!
The interest rate can be calculated in different ways, these are the varieties that are related to the calculation of interest:
Simple interest rates
The simple interest rate is the interest that is generated from the initial capital during the whole period, that is, that the interest generated does not continue to generate new interest.
Compound interest rates
The compound interest rates are the generated interest that increases the initial capital and returns to produce new revenues.
Depending on the stability during the current period of time of the operation, the interest rate can be subdivided into two types:
Fixed interest rates
The fixed interest rates are those that remain impermeable over time. It is fixed at the beginning of the operation and remains constant until the end of it.
Variable interest rates
The variable interest rate undergoes modifications during the established period of time. It is constituted by a reference index and a differential margin. The EURIBOR is included in the variable interest.
Mixed interest rates
During a period of time, generally at the beginning of the operation, the interest rate is fixed, then it starts to behave as a variable interest and can be modified.
Finally, depending on the relationship with the inflation rate. There are different types of interest:
Nominal interest rate (TIN)
The nominal interest rate is the interest rate agreed upon in the loan operation. It is the result of the real interest rate and the inflation rate, in short, the real cost of the loan, that is, the final amount that the borrower must repay.
Real interest rate
The real interest rate is the nominal interest rate less inflation. The final result refers to the final gains.
Effective interest rate
It takes into account all the expenses derived from the operation. Interest is updated through compound capitalization. Generally, the effective interest rate is updated annually (APR). You can also mention periods of less than one year, monthly, half-yearly, quarterly … etc.
Legal interest rate
The legal interest rate is the one stipulated by the law, it is usually used when there is no prior agreement on the terms of the operation.
Each operation or entity determines the interest rate to which you want to link the conditions of your loan or investment. Next, we focus on the interest rates applied in crowdlending operations, both from the point of view of the investor and the borrower.
The interest rate on a loan or investment in crowdlending
The interest rate used by MytripleA in crowdlending operations is a simple and variable interest rate updated with the EURIBOR index in the case of operations over one year.
Unlike other products, in many of the crowdlending operations offered by MytripleA, the interest produced is received on a monthly basis, so you can either start having the benefits the month after your investment or you can also reinvest those benefits to multiply your profitability.
Clarification: A concept that is linked to the interest rate is the system of amortization of the investment or the loan, since depending on how it is, the way of calculating the interest rate will vary. The French amortization system is used in loans and crowdlending.
French amortization system
This type of amortization consists in applying the percentage of the interest rate on the capital pending amortization. In the case of loans and investments, this type of amortization is generally used, therefore interest or profitability will be applied to the capital that is still to be paid or received. In the crowdlending this type of amortization system is applied so you have to take into account that you pay (in the case of being a company that requests a loan) or you will receive profitability (in the case of the investor), the percentage of the type of interest applied on the living capital taking into account that month to month you receive or pay monthly installments of capital and interest. That is where the crux of the matter lies and where many of the doubts about how the profitability or the interest rate in crowdlending is calculated. Therefore, in this case, the amortization of capital acts increasingly, while interest is amortized in a decreasing manner.
Once you know what type of interest is used, we explain what characteristics are taken into account to determine one type of interest or another.
Aspects to take into account to determine the interest rate
From the perspective of the applicant of a loan, the interest rate on the loans for crowdlending is determined by the risk of non-payment. Therefore, from MytripleA, all the documents related to the company and its activity are analyzed, and once the analysis is determined, the interest rate is fixed.
The interest rate offered by MytripleA is from 2% per year + EURIBOR for those companies that have a guarantee from a Reciprocal Guarantee Company. For those companies that are financed without the SGR endorsement, interest rates rise to approximately 6-8%.
From the investor’s point of view, the interest rate also refers to the risk-return ratio. The greater the risk involved in the operation, the greater the profitability will be offered. The interest rates you can access as an investor through MytripleA are from 2% + EURIBOR up to 10%.
How to calculate the interest rate of a loan or investment
Once you know everything about the interest rate, you only need to calculate the interest rate for your loan or for your investment- special info. For this reason, from MytripleA we have developed a tool to calculate the interest rate of your loan, and another to simulate your investment.
Infographics of interest rates
In the following infographic, we leave you a summary of the types of interest rates.