The difference between fixed and decreasing interest concerns everyone who wants to obtain a financial or real estate loan from a bank or deal in a new commercial project, so we found it very important to clarify these differences so that you have the option to deal according to the diminishing interest Or fixed, learn with us about the types of benefits and the essential differences between them, and is there a preference for one over the other or not.
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Using This term is in the world of financial management of all kinds, and the interest rate is determined as a percentage of the total amount due, according to the years during which the payment is made, and there are more than one type of it, which makes some people feel confused if they have the opportunity to choose between different types of interest, so We found it necessary to clarify the terms of fixed, variable, and decreasing interest, and define each of them, so that the picture would be clearer for non-specialists in the world of finance and business when they start entering this field, by setting up a business or borrowing money from a bank or other.
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Fixed interest
When talking about the difference between fixed and decreasing interest, it is necessary to start with fixed interest and define it, as it means a fixed rate of increase over the amount that does not change for a period of time that is determined between the two parties to the contract, where it is paid The debtor is the amount in addition to the interest due on him equally over the number of months or years, according to the agreement, and now how can the fixed interest rate be calculated:
For example, if you deposited 100,000 dirhams in a bank and the interest was 8% for one year, the interest earned at the end of the first year is the product of multiplying the interest rate by the original amount, where the annual revenue is 8% * 100,000 = 8,000 dirhams In addition to the original amount, the total at the end of the first year will be 108 thousand dirhams. In the event that the customer pays a loan that he had obtained with a fixed and fixed interest rate from the beginning, all the installments that the customer pays are equal in value throughout the agreed period of repayment, whether it is one year or a group of consecutive years, and in the case of the loan with a decreasing interest, the matter differs In a bit, we will explain the difference between fixed and declining interest in the next paragraph.
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Diminishing Interest on Loans
The clearest difference between fixed and decreasing interest is that decreasing interest means paying more than the interest owed on the loan in the initial repayment period for a fraction of the actual loan amount, while the installment gradually decreases in The following years, and the idea can be simplified and interpreted as the price whose value is determined based on the remaining part of the loan amount after each year, as the interest decreases year after year after part of the amount is paid.
Clarification: What the customer pays in the first year of obtaining the loan = the value of the total loan amount x the agreed interest rate x the number of monthly payments in a year / 12 months.
In the second year, the interest decreases to become achieved according to the following formula: (total loan value - the amount that was paid during the previous year's installments) x the specified interest rate x the number of payments in the year / 12 months.
In the third, fourth, and fifth year, and so on, the value of the installment payable is calculated according to the same formula for the second year.
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An example of a decreasing interest for a loan
If the borrower obtains an amount of 100,000 dirhams at a decreasing interest rate of 10% and pays in 10 installments, for example, then the calculation of the value of the installment is as follows:
The value of the first installment = the value of the total amount of the loan at the prescribed rate = 100 thousand x 10% = 10 thousand dirhams.
The value of the second installment = (total value of the loan - the value already paid) x 10% = (100 thousand - 10 thousand) x 10% = 90 thousand x 10% = 9000 dirhams.
The value of the third installment = the percentage due multiplied by the remaining amount of 9000-9000 = 81000, so that the value of the installment = 81000 x 10% = 8100 dirhams, and so on until the end of the ten installments, so that the value of each installment decreases from the previous one.
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Is there a distinction between fixed and diminishing interest that gives one preference over the other
If we carefully look at the definition of fixed and diminishing interest, which we detailed with the above illustrations, we find that there is no preference for one over the other in terms of the amount that the borrower pays By paying it over the same agreed repayment period, but the disadvantage of the decreasing interest is that if the customer wants to pay the rest of the amount in one go, the only beneficiary is the bank that gets its profit early in the form of the interest rate on the loan.
The essential difference between the two types is that the reducing interest is that the greater part of the interest on the loan is paid in the first installments as opposed to a small part of the loan amount itself.
So try to get acquainted early on the payment schedule from beginning to end, and identify the part that has been allocated to pay the interest and the part allocated to repaying the loan amount, and then you can distinguish between the type of interest that you want to apply and work with.
What is the variable interest rate
After we know the difference between fixed and decreasing interest, some interested in financial management may need some information about the variable interest rate, as it can be defined as a floating interest rate, that is, it varies upwards. Or downward according to the change in the interest rate index in the market, and interest rates on investment certificates and credit cards fall under this type of interest.
As for the rate that is the basis for applying variable interest rates, it is known as “LIBOR”, which is where the variable interest rate is equal to LIBOR + x%, and as an illustrative example of that; If a customer obtains a loan from a bank amounting to 30,000 US dollars, and the variable interest on the amount is LIBOR + 2% (6 months) for a period of one year, then the LIBOR ratio, if it was in the first six months, is 3%, then the interest on the amount is 3 % + 2% to become 5%, and if the LIBOR changes to a value of 5% or decreases to 2%, then the interest changes in the second period of the year to become either 5% + 2% = 7%, or it becomes 2% + 2% = 4 This is the interest that the borrower must pay on the loan amount in addition to the principal amount.
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The essential differences between fixed and variable interest
We have tried as much as possible to clarify the difference between fixed and decreasing interest, and we have exposed together what is known as variable interest, to clarify the idea for those who wish to obtain a loan or enter into a new business He needs to know that information.