‘What would someone gain by lending me money?’
If this question has ever crossed your mind, this article is the answer to it.

In this article I have explained how interest works, and how to calculate interest on your debt.

Let’s dive right in!

What Is Interest 

Interest is basically the payment of taking a debt. Creditors charge interest because debtors have taken cash in hand away from them and they need a compensation payment for it.

This is because there are certain risks attached to giving debt to someone. These include late payment of the debt or not payment at all!

To compensate all risk, creditors claim interest according to the amount that they have given out as debt. Debtors usually negotiate a rate of interest which they agree to pay on a debt. The creditors then charge interest according to this agreement annually.

Remember though, interest can only be charged annually. The total percentage is only to be paid on an annual basis. This rate can then be adjusted according to 30 days if your lender wants to claim interest on a monthly basis.

Interest is also applied on commercial debts. Businesses usually find their financing by taking commercial debts and equity. These debts are taken from the Bank Of England or someone with a lot of financial backing. 

Interest is charged on the day the debt was taken. The money is to be paid exactly on the date that the original debt was taken.  Interest is a part of the repayment of the debt.

Remember, the amount that you are supposed to pay is often predetermined. In the payment terms of your debt, you will probably see the amount of interest that you have to pay on your debt.

There are two types of interests:

Contractual Interest

When you borrow money, especially as a business, you have to sign a contract which serves as the acknowledgement of your debt. Interest would be charged according to this contractual agreement and you are given the chance to negotiate this rate when you take the loan.

At this point you need some advice if you are new to debts on whether or not you’re paying a good rate for your loan. Make sure to ask around before taking a loan and check the base rate of the Bank Of England.

It is advised that when dealing with loans, keep everything on paper so that any disputes that occur afterwards become easy to deal with.  

Statutory Interest

Statutory interest starts accumulating in the case of late payment of debt. If you are late, there’s a price attached to it. This price for the late payment is known as statutory interest. Your creditor can claim statutory interest on a daily basis.

Statutory interest is applied so that everyone avoids late payment of debt. The exact rate is 8% plus the Bank Of England Base rate. This base rate is set especially for business to business transactions and can be found on their website.

Your credit can also claim statutory interest in case of the late payment of interest. This means that you have to pay the total amount and the cost of borrowing on the day your debt ends.

When Is The Payment Considered Late?

Whenever you borrow an amount, your lender gives you a date by which you need to pay it back.

This due date is when your loan is due, along with any interest payments attached to it. 

If you miss this due date by even one day, additional costs start accumulating on your debt. These additional costs are added to the total amount to be paid back to your lender and are calculated by each day that your payments are late.

There can also be a fixed fee for a late repayment, even if that repayment is late by one day or a 100. This information is usually given in the contractual terms of your loan. Make sure you read the information carefully before agreeing to the terms.

If you are taking a loan from a company, make sure you check out their website first to see if you are even eligible to take this loan before you spend time in filling the application form.

However, late payments don’t get reported to credit bureaus until they are around 30 days late. A late payment will appear in your credit report only after it is late by at least 30 days. 

days this would payment interest

Charging Interest That Is Too High

There’s actually a limit on the maximum cost you can attach to a debt. Legally, if your creditor tries to claim interest at a rate higher than 25%, it is illegal and you won’t have to add interest on top of your debt.

How To Calculate Interest On Your Debt

The calculation of the cost of debts is daily simple. As the rate is expressed in terms of a percentage, it is actually easy to calculate the costs attached to your debt.

The formula is

A= P( 1+ rt )

Here, 

  • P is the total amount you borrowed from the lender.
  • R is the interest rate divided by 100.
  • A is the amount that is to be paid.
  • T is the number of time periods that have gone by

If you want to simplify this to a daily basis, you need to divide the rate by 365 to get the daily interest that you need to pay. And for the payment over 30 days, divide the rate by 12.

company x 0 administration

FAQs

Is Interest Mandatory On Debts?

Yes, if you have agreed to pay it already, there’s no avoiding it. As per the rules set by the Financial Conduct Authority, you cannot go against the contract for your loan. 

If you own a business, it can be shut down due to non-payment. Businesses have an even stricter set of rules when it comes to debts. Your business can be made bankrupt if you decide not to pay the cost of your loan.

Is There A Limit On The Amount Of Interest That Can Be Charged?

Yes, the maximum rate that can be charged by any business or individual over a loan is set at 25% for England. By law, you cannot charge any rate above this.

Is There A Way I Can Get My Interest Rate Reduced?

Yes, you can talk to your creditors and explain your situation to them. However, if you have already agreed to pay a certain amount of interest, it can be hard to get your creditors on-board for the agreement.

This is because since it’s a contract, you are required by law to follow it. 

Can I Go To Jail For Not Paying Interest Charges?

No, you cannot go to jail for unpaid loans. Your creditor also cannot threaten you that he’ll take you to jail if you don’t complete your payments and pay him his money back.

Any unpaid loans, including credit card loans, payday loans and store credit cannot make you go to jail. 

A debt is a contract and the law does not allow anyone to go to jail because of their financial circumstances.

Is There Something Called Daily Interest?

Yes, statutory interest is charged on a daily basis. Moreover, If you want, you can adjust your interest rate over a period of 365 days for you to simplify your finances, but that doesn’t mean that it’s payable every day, you only have to pay it once a year.

However, in some contracts there’s a requirement for a monthly payment of interest. Go over your contractual agreement to know when your interest is payable.

Afterword

Debt matters are complicated, which is why you need to have professional advice with respect to your financial situation.


Keep on reading articles from our website for additional guidance on debt and feel free to reach out on the given email address if you want any additional information.

Good luck!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
×
×Find your best debt solution SEE IF YOU’RE ELIGIBLE