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Capitalized Interest Formula:
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Capitalized interest refers to the interest that is added to the principal balance of a loan, rather than being paid immediately. This increases the total amount owed and results in interest being charged on interest in subsequent periods.
The calculator uses the capitalized interest formula:
Where:
Explanation: The formula calculates the simple interest that would be capitalized (added to the principal) over a specified time period.
Details: Understanding capitalized interest is crucial for borrowers to comprehend the true cost of loans, especially student loans, mortgages, and construction loans where interest may be deferred and added to the principal balance.
Tips: Enter the principal amount in GBP, the annual interest rate as a percentage, and the time period in years. All values must be positive numbers.
Q1: What types of loans typically involve capitalized interest?
A: Student loans, construction loans, and some mortgage products often include capitalized interest during deferment or grace periods.
Q2: How does capitalized interest differ from compound interest?
A: Capitalized interest is specifically added to the principal balance, while compound interest refers to earning interest on both principal and accumulated interest.
Q3: Can capitalized interest be avoided?
A: In some cases, making interest payments during deferment periods can prevent interest from being capitalized.
Q4: How does capitalized interest affect the total loan cost?
A: Capitalized interest increases the principal balance, which means future interest calculations will be based on a higher amount, increasing the total cost of the loan.
Q5: Is this calculator applicable for all types of loans?
A: This calculator provides a basic estimation of capitalized interest. For complex loan structures with varying rates or compounding frequencies, consult with a financial advisor.