The Beauty of Interest

Imagine one time when you were in need of an emergency fund of Rp. 800,000 for one month and someone offers you funds with the following calculation: You get Rp. 800,000 now and have to pay back Rp. 1,000,000 one month later. The person said that the interest for this scheme is 20% (interest is IDR 1,000,000 - IDR 800,000 = IDR 200,000 divided by IDR 1,000,000). What is your comment? Is this calculation method correct? 

There is something that needs to be straightened out from the calculation above, namely that the percentage of interest is calculated from the NET INITIAL FUND. So in the scheme above, the interest is Rp. 200,000 / Rp. 800,000 = 25%. There is a 5 (five)% difference only in the way of conveying interest. 

What if in the scheme above you are also required to pay administrative fees, insurance, etc. of Rp. 50,000 so the money you receive is Rp. 750,000? Then the effective interest (a term to express interest used in a financial environment) is Rp. 250,000 / Rp. 750,000 = 33.33%. The interest cost in this case is Rp. 1,000,000 - Rp. 750,000 = Rp. 250,000.

In the banking and financial industry some fees are deducted and these must be taken into account in order to assess the effective interest rate. The costs that must be incurred can be in the form of administrative costs, provision fees, fiduciary fees, survey costs, appraisal fees, guarantee storage costs, and other costs.

This can also be applied in other calculations, for example calculating the growth ratio of a number always has to be divided into the initial number. If someone says that his property at the end of the year is Rp. 100,000,000 and in the last year he obtained a growth of 25%, so his wealth at the beginning of the year was Rp. 80,000,000 (Rp. 1,000,000 / (1 + 25%)).

Often people are fascinated and fooled by the word sponsor's persuasion in the promotion of credit interest. Low credit interest rates are not necessarily the cheapest installments. It could be that a high credit interest rate is the cheapest installment. Promotion of low credit interest cannot guarantee that your total loan will be low as well.

Based on their nature, interest can be divided into fixed and floating interest (fixed interest rate) and floating (floating interest rate).