Loan Education
Daily Compounding Interest
Daily compounding interest refers to the calculation of interest on a credit card on a daily basis. It means that the interest earned or charged is calculated and added to the principal balance every day, rather than monthly.
With daily compounding interest, the interest is calculated based on the current balance of the loan or investment each day. The interest rate is divided by the number of days in a year to determine the daily interest rate. This daily interest is then multiplied by the outstanding balance and added to the principal, resulting in a new balance for the next day. This process continues every day, allowing the interest to compound or grow over time.
Simple Interest
Simple interest is a straightforward method of calculating interest on a loan or investment based on the original principal amount. It does not take into account any additional interest that may have been earned or charged over time.
To calculate simple interest, you need to know three variables: the principal amount, the interest rate, and the time period for which the interest is being calculated.
The formula for simple interest is:
interest = (principal) x (interest rate) x (time)
Why a personal/consolidation loan over high interest credit cards:
1. Fixed repayment schedule: personal loans come with a fixed repayment schedule, usually in the form of monthly installments over a set period. This can be beneficial for budgeting purposes, as you know exactly how much you need to pay each month and can plan your finances accordingly. Credit cards, on the other hand, offer flexible repayment options, but the minimum payment can fluctuate, making it harder to budget.
2. Debt consolidation: if you have multiple high-interest debts, such as credit card balances, consolidating them into a single personal loan with a lower interest rate can help simplify your finances and save money on interest payments. This strategy can make it easier to manage and pay off your debt
3. Potential credit score improvement: taking out a personal loan and consistently making on-time payments can positively impact your credit score over time. Credit utilization, which is the ratio of your credit card balances to your credit limits, can have a significant effect on your credit score. By paying off credit card debt with a personal loan, you can lower your credit utilization and potentially improve your credit score.
4. Lower interest rates: personal loans typically have lower interest rates compared to credit cards. This means that borrowing money through a personal loan may be less expensive in the long run, especially for larger loan amounts or longer repayment terms.