What is Interest Rate?

Interest is the fee paid by the borrower of an asset to the lender. When you borrow an asset like money, there is a particular interest you need to pay plus the principal amount of money you borrowed.

Interest rate is the rate at which you need to pay for the interest in a certain period. Usually, the interest rate is expressed in percentage per year.

Why is it Important to Learn Interest Rates?

Every time you borrow money or apply a loan from some one or through the banks, you will always encounter the word “interest” or “interest rate”. It is the most important terms you should know before applying any loans.

In investing or banking, interest rate is the rate at which how much money can you receive from the principal amount of money you invested or put in a deposit account.

Once you know the interest rate, you will know how much money can you get for a certain period just for example in one year.You will be able to determine the total amount of money you can get for a particular investment if you know the interest rate.

I will give you an example. A savings account typically gives 1% interest rate per year. If you put $1,000 in a regular savings account, it will earn $10 of interest from the $1,000 you put in the account excluding the taxes and fees.

Types of Interest

In general, interest has two types: simple and compound interest. Simple interest is calculated only on the the principal amount of money without the factor of time value of money.

On the other hand, compound interest is a kind of interest in which the interest rate is calculated with factor of time. In compound interest, the interest of the previous periods plus the corresponding principal money is included in the current calculation of obtaining the interest.

Interest rate is one term in finance that every investors or even normal individuals should know and learn to be able to determine the amount of money that will be gained. You can easily know the interest rates from the terms and conditions of your loans or investment schemes.

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