Interest on interest represents the difference between the nominal and effective interest. With our Excel calculation module you can easily calculate the interest on interest of your loan. For the calculation of the interest on interest, the Excel calculation module assumes that you pay interest monthly instead of once a year. Because with a monthly repayment you need the interest amount earlier than at the end of the year, you cannot receive interest on this amount on, for example, a savings account. As a result, the interest that you actually pay (effective interest) is a fraction higher than the interest based on a monthly repayment (nominal interest).
When calculating the effective interest in our Excel calculation module, monthly repayment and the effect of interest on interest are taken into account. That is why the effective interest that our Excel calculation module calculates is higher than the nominal interest. Nominal interest does not take into account an annual interest payment.
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