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Table of Contents

Anticipated Interest Definition

What Is Anticipated Interest?

In finance, the term “anticipated interest” refers to the total interest payments expected to be earned over the life of an investment. In the case of debts, anticipated interest refers to the total amount of interest payments expected over the lifetime of the loan, assuming no change in principal. In banking, it can also refer to the expected interest earnings from a savings account, absent any deposits or withdrawals.

Investors can increase their anticipated interest income by increasing the amount of principal they invest, negotiating a higher interest rate, or calculating their interest payments on a more rapid schedule—such as by using daily compounding instead of monthly compounding. On the other hand, debtors can decrease their anticipated interest obligation by borrowing less, securing a lower interest rate, or using a longer compounding period.

Key Takeaways

  • Anticipated interest is the amount of interest expected to be earned or paid on a savings vehicle or loan.
  • It is often used when comparing savings accounts or loan products.
  • Investors can increase or decrease their anticipated interest by adjusting their payment schedule, interest rate, or compounding schedule.

How Anticipated Interest Works

Anticipated interest is calculated based on the assumption that there will be no additional deposits or withdrawals to or from the account for the duration of the term. If these transactions do occur, then they would have an effect on the account’s anticipated interest.

For example, a savings account would offer higher anticipated interest if the account holder deposits more funds into the account, while withdrawing funds would cause anticipated interest to decline.

The opposite is true when debts are involved. For instance, in the case of a mortgage loan, anticipated interest refers to the total interest payments expected to be paid throughout the remaining years of the loan. If the homeowner decides to make more than the required monthly payments, this would pay off the outstanding balance of the mortgage more quickly and would therefore lead to lower anticipated interest on the loan. In this scenario, the actual interest received on the loan would be less than its original anticipated interest.

Anticipated interest will of course vary depending on the interest rate and other terms offered on the account or loan product. For instance, investors who put their savings into relatively high-yield savings accounts, such as those sometimes offered by online banking platforms, would have higher anticipated interest compared to someone putting the same sum into a traditional savings account. Other factors, such as any transaction fees charged on the account and the frequency at which the bank calculates compound interest, can also impact the account’s anticipated interest.

Example of Anticipated Interest

Michaela has recently sold her house and is researching savings accounts in which to deposit the proceeds. Her local bank, XYZ Financial, offers two main savings vehicles: one is a traditional savings account that she can open through her local bank branch, while the other is a higher-yielding account that can only be opened online.

Reading over their terms and conditions, Michaela notes that the traditional account offers a 1.00% interest rate that is compounded on a weekly basis (52 compounding periods), whereas the online option offers a 1.20% interest rate that is compounded once per day (365 compounding periods). Given that her intention is to invest $100,000 in either account, Michaela calculates that over a one-year period, the traditional savings account would offer $1,004.92 in anticipated interest whereas the online account would offer $1,207.21 in anticipated interest. Both figures assume that there are no additional withdrawals or deposits to either account over the course of that year.

How Do Banks Calculate Your Interest Rates?

Lenders use a variety of factors to calculate interest rates on loans, including the borrower's income, credit risk, available assets, and prevailing market conditions. They will also consider any property that is offered as security, meaning that you can get a lower interest rate by offering a large amount of collateral.

How Can You Get a Lower Credit Card Interest Rate?

You can negotiate a lower rate with your credit card issuer, especially if your financial condition has improved. While there's no guarantee that your issuer will agree, they may be willing to reduce their rates if you have a long record of on-time payments. You can also mention changes in your income, credit history, or other card offers that you've received as leverage for a lower rate.

How Are Interest Rates Determined?

Interest rates are determined by the supply and demand for loans and credit, based on the profitability and risks associated with different types of investments. Riskier investments tend to incur higher interest rates, while safer investments have lower interest rates. Rates are also determined by the federal funds rate, a target rate set by the Federal Reserve for short-term interbank loans.

Article Sources
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  1. Experian. "How to Negotiate a Lower Interest Rate on your Credit Card."

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