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PERIODIC RATE

If the interest rate are compounded several times within a year then annual percentage rate calculation becomes meaningless, in order to find out the interest rate for such circumstance periodic rate is calculated. Periodic rate is nothing but the annual rate of return divided by the no of compounded period within a year to which interest are calculated. It is also called as nominal rate. In this case the period under consideration may be within week or month or even quarters. If the interest rate is calculated every quarter then the annual interest rate must be divided by 4, similarly by 12 if the interest rate is calculated every month similarly it is calculated for other period based on the time period considered for calculation of interest. Some of the types of periodic interest are,

• Quarterly interest rate
• Monthly interest rate
• Weekly interest rate
• Daily interest rate.

It is important for the loan bearer to get to know about the interest rate he/she is suppose to pay at end of every completed time period. The loan giver must clearly mention the various cost and other rate that might affect the interest rate as a whole clearly in the contract. It is duty of the interest payer to read those clearly before making any decision on the loan. Quarterly interest rate will be lesser than the annual interest rate as interest are paid every quarterly, however the amount that is paid as interest at the end of every year will be same. It depends on the ability of the interest payer, if the interest payer can pay interest at the end of every month then interest are calculated every month, whereas if the interest payer can pay only at the end of every quarter then it is calculated accordingly.

Problem in Periodic interest rate are,

• There may be some hidden cost which cannot be included in Periodic interest rate.
• Periodic interest rate alone cannot be used to evaluate the loan structure.
• Periodic interest rate alone cannot be used to compare two or more loans.
• The loan period must be know precisely to make good judgment using this method, however in most of the case payment of loan depends upon the availability of the funds.
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