What is Adjusted Interest?
Adjusted interest is one of the “tricky” calculation methods developed by lenders.
Adjusted interest is based upon a specific rate of nominal interest. For example, we can calculate a 12% nominal interest rate by using one of the “tricks”, which we will explain by giving an example.
John received a $10,000 loan at 12% nominal interest, to which the following conditions are attached: At the end of every three months (the fiscal quarter), the amount of interest will be calculated for that period.The interest for a quarter is 3% (12% x 1/4). The amount of interest after the first quarter is $300 (3% of $10,000). The amount of interest per quarter is not actually paid. It is added to the principal at that time.
The principal is now updated to $10,300.
In the second quarter, the amount of interest for the quarter is calculated again, and it is now $309 (3% of 10,300).
The sum of $309 is added to the principal at the end of the second quarter, and the updated principal is now $10,609. At the end of every quarter, the amount of interest accumulated during that quarter is added to the sum of the principal. The value of the principal is calculated as follows: It is evident that adjusted interest is calculated according to the same format as compound interest. Instead of once a year, however, it is calculated for shorter periods. In our example, adjusted interest is calculated as compound interest on a quarterly basis. Had we calculated the amount of interest every month, we would have stated that the adjusted interest was calculated on a monthly basis.
In our example, the amount of interest is $1,255, and the percentage of adjusted interest is:
The adjusted interest denotes the interest that we must actually pay for the loan. If, for example, we have received a one-year loan, and the bank indicates that the adjusted interest for the loan (calculated on a quarterly basis) is 13%, then this means that we must pay back $11,300 ($10,000 in principal and $1,300 in interest).