The mathematical expression used to determine the cost of borrowing money involves several key factors: the principal amount (initial loan), the interest rate (expressed as a percentage), and the loan term (duration). For example, a simple interest calculation multiplies these three factors. More complex calculations, such as those for compound interest, involve exponential functions to account for interest accruing on accumulated interest.
Accurately assessing the cost of a loan is crucial for both lenders and borrowers. For lenders, it ensures profitability and appropriate risk management. Borrowers benefit from a clear understanding of their financial obligations, enabling informed decisions and responsible budgeting. Historically, interest calculations have evolved from simple methods to more sophisticated formulas reflecting the time value of money and the compounding effect of interest. This development underlines the increasing complexity of financial instruments and the need for precise calculation methods.