Nominal Interest Rate
The nominal interest rate is the most basic method of calculating interest charges that most people implicitly understand.
For example a $100,000 loan at a nominal interest rate of 5% would mean a $5,000 interest charge.
The irony is that loan products offered by lenders at nominal interest rates are as rare as a hail storm in Singapore.
However, to help the average home buyer understand their mortgages better, sometimes interest charges on a home loan is expressed as nominal interest rates to improve comprehension.
Bankers who do this would of course inform the borrower that these numbers are just an expression.
For example, if a $100,000 end up with a total payment of $106,000 made by the borrower at maturity, then the nominal interest rate can be expressed as 6%.
It must be noted that nominal interest rate takes on a different meaning in general financial planning where it accounts for inflation and other variables.
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