Different ways of interest rate calculations in home loan in Bangladesh

Compounded interest. Under compound interest calculations a fixed monthly payment is made throughout the life of the loan on an annuity basis. Periodic payments on compound interest loans include mostly interest payments in the early years of the loan and principal payments only become important when the loan matures. This is the most common way to calculate interest and is used by most of the financial sector.

Simple interest. Under a simple interest loan a fixed amount of principal is repaid every period and interest is charged on the outstanding balance only. Periodic payments on a simple interest loan are the sum of interest and principal installments over the life of the loan divided by the number of payments to be made. Therefore, repayments made in the early years do not cover the interest on the outstanding principal adequately, effectively lowering the interest rate on the loan.

Flat rate. Several MFIs charge a flat rate for the entire loan period. No adjustments are made for principal repayments during the course of the loan. A flat rate therefore has a higher effective rate than the quoted rate. It is used for reasons of simplicity on small loan repayment calculations and because the quoted rate appears low, which has a positive effect on borrowers.