How to Avoid Compounding Interest

If you have acquired a loan from bank or have been using credit card freely, you must be worried about compound interest.

This interest can put you in serious trouble if you do not control it from growing. About 50 percent of people, who get loan for their personal or business use, fail to make payments on time and ultimately face huge interest rates.

Compound rate is the fee that banks collect from you for giving you loan. Another form of compound interest that annoys most people is credit card interest. Compound interest grows every time you fail to make a payment because it is an interest on interest.

Instructions

  • 1

    Stop spending beyond your means

    This is for credit card holders. Since credit cards trigger compound interest charges if you delay payment, you must cut back on your spending. Do not spend too much through credit card.

    For example, daily use items can be purchased with cash. If you use credit card for single thing like food, clothing and home appliances, you will probably be more vulnerable to compounding of interest on your credit card.

    Remember, compound interest is an interest on the interest that has already been incurred the last time you failed to make a payment.

    The same holds true for a loan that you get from a bank. If you are slow in paying off the loan, you will face interest on interest plus principal amount for the upcoming period (a month/six month/year).

  • 2

    Stop getting cash advances

    This is also for credit card holders. If you get cash advance through your credit card, the interest that is charged is usually over 20%. So, avoid cash advance in order to stay on the safe side.

  • 3

    Get lower interest rates and simple payment terms and conditions

    Another good way to avoid compound interest mess is to get lower interest rates when applying for a loan. Since banks look to give loan to as many people as they can, there are typically several payment options designed for multiple borrowers with different financial strength. If you think you are on a tight budget and cannot afford to pay big interest charges, you can ask for a more flexible rate and simpler payment terms and conditions.

  • 4

    Pay on time

    This is the simplest advice that every borrower is given when they get a loan, but only a few act on it. Paying your loan (principal + interest) each period (month, six month, year) can save you from paying extra interest on the last amount that could not pay.

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