### How banks calculate interest on loans

Most people today take loans from banks they do not know a lot about how banks calculated their interest rate and the amount they pay. The purpose of this content is to help the broad masses of people to learn something about conformal and proportional method of calculation of the loan.

The fact is that the clients of the bank, paid a high penalty interest rates and they are not aware of that because of the method of calculation.

The questions are:

How the bank does calculate the interest rate on the loan?

**Simple and compound interest account**

Calculation of interest rates is divided in two ways:

**SIMPLE METHOD – PROPORTIONAL METHOD**

**COMPLEX METHOD – CONFORM METHOD**

As the very word says is the obvious difference between the proportional and the compound method.

We will try to explain why people often make the same mistake because what is simple does not necessarily mean that it is cheaper. Much of the population thinks that the compound method is always more expensive than the proportional method, because it is the interest on the interest, in several cases it does not have to be the rule.

**PROPORTIONAL METHOD **in accounting for interest rates obtained by different loan amounts, depending on whether the interest is calculated at the end of the repayment period or is calculated over several times during the repayment period.

If the interest is calculated at **the end of the repayment period** which is the better way, to be paid less.

If the interest is calculated **several times during the loan repayment** results in a greater amount of interest.

**CONFORM METHOD **in accounting for the interest rate obtained for the same amount regardless of whether the interest is calculated once or more times during the loan repayment.