INTEREST RATE

The cost of money measured as a percentage on the amount borrowed. Interest is a measure of time because a developer will lose interest on the cost of development proportional to the time spent to develop. The measure is either the cost of money borrowed, or opportunity cost if the developer uses his own money. Interest erodes the value of future income, and benefits over time. Therefore, the true value of a future cash flow is determined by discounting those future amounts by an appropriate discount rate. Interest rate should be quoted as an effective rate for comparison, and feasibility purposes.

The true cost of borrowed finance should be determined after deducting any necessary cost to the borrower from the principal lent. For example, legal, stamp duty, fees and charges. The easy way to account for these is to determine the rate on the net borrowings, that is after costs.

See:
nominal interest rate
real estate finance

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