Cumulative Interest

AAA

DEFINITION of 'Cumulative Interest'

The sum of all interest payments made on a loan over a certain time period. On an amortizing loan, cumulative interest will increase at a decreasing rate, as each subsequent periodic payment on the loan is a higher percentage principal and a lower percentage interest.

INVESTOPEDIA EXPLAINS 'Cumulative Interest'

Cumulative interest is sometimes used as a measure of loan economics to determine which loan is most economical. However, cumulative interest alone does not account for other important factors such as initial loan costs (if those costs are paid out of pocket as opposed to being rolled into the loan's balance) and the time value of money (different rates of interest over the life of different loans can lead to savings early in the life of one loan that can offset higher interest rates later in the life of that loan).

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Compound Interest

    Interest calculated on the initial principal and also on the ...
  3. Interest

    1. The charge for the privilege of borrowing money, typically ...
  4. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  5. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  6. Structured Transaction

    A series of transactions that could have been treated as a single ...
RELATED FAQS
  1. How does your checking account affect your credit score?

    Your credit report provides a snapshot for prospective lenders, landlords and employers of how you handle credit. For any ... Read Full Answer >>
  2. What is the banking sector?

    The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial ... Read Full Answer >>
  3. What's the difference between a letter of credit and a bank guarantee?

    Bank guarantees represent a more significant contractual obligation for banks than letters of credit do. A letter of credit ... Read Full Answer >>
  4. How do leverage ratios help to regulate how much banks lend or invest?

    Banks are among the most leveraged institutions in the United States; the combination of fractional-reserve banking and Federal ... Read Full Answer >>
  5. Can I use a prepaid credit card to pay bills or to transfer money to other accounts?

    Prepaid credit cards may be used to both pay bills, either as a one-time transaction or recurring transaction, and to transfer ... Read Full Answer >>
  6. What’s the difference between overdraft protection and overdraft settings?

    Overdrafting refers to the practice of granting short-term credit to an account holder when his or her balance reaches zero. ... Read Full Answer >>
Related Articles
  1. Retirement

    Top 4 Reasons To Save For Retirement Now

    No more excuses. Make sure you are financially secure and independent for your golden years.
  2. Bonds & Fixed Income

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  3. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  4. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  5. Budgeting

    Teaching Your Child To Be Financially Savvy

    If you start today, you can set your kids up for a lifetime of smart money management.
  6. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  7. Options & Futures

    Investing 101: A Tutorial For Beginner Investors

    Do want to invest, but don't know how to begin? We'll show you the building blocks you need to get started.
  8. Economics

    Explaining the Liquidity Coverage Ratio

    The liquidity coverage ratio requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather market stress.
  9. Investing Basics

    Calculating the Tier 1 Capital Ratio

    The Tier 1 capital ratio is a measure of a depository financial institution’s financial health and capital adequacy.
  10. Savings

    Explaining Term Deposits

    A term deposit (more often called a certificate of deposit or CD) is a deposit account that is made for a specific period of time.

You May Also Like

Hot Definitions
  1. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  2. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  3. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  4. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  5. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
  6. Himalayan Option

    An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!