Interest
Candlefocus EditorInterest is the cost of borrowing money or the compensation a lender receives for allowing the use of their funds. It is usually expressed as a percentage and is calculated on an annual basis, referred to as the annual percentage rate (APR). Interest can be earned by lenders when they lend their money, or paid by borrowers when they make use of the funds.
When calculating interest, there are several things to consider. First, the type of interest being applied. The two types of interest are simple interest and compound interest. Simple interest is what is applied when interest is charged on the principal amount only. It can be calculated as (principal x interest rate x length of time). Compound interest, on the other hand, is when interest is calculated on the principal amount along with previously-earned interest. Compound interest follows the formula (principal x interest rate x length of time)^2.
Secondly, the interest rate applicable to the loan must also be taken into account. Interest rates are highly dependent on macroeconomic policy set by the Federal Reserve's Federal funds rate. Generally, the higher the Federal funds rate, the higher the interest rate.
Interest is often seen in connection with credit cards, mortgages, car loans, private loans, savings accounts and penalty assessments. When using a credit card, the interest rate is usually the amount paid on borrowed money if the amount is not paid in full each month. This means depending on the amount of credit used and the interest rate, very high amounts can be charged in the form of interest.
On mortgages, the interest rate will vary depending on the amount borrowed, the length of time it is borrowed over and the type of loan (fixed or variable). Fixed interest rates will remain the same throughout the repayment period, while variable rates can increase and decrease depending on external economic factors.
For car loans, personal loans, and savings accounts, the interest rates charged depend on the lender and the amount borrowed. Generally, higher loan amounts will mean higher interest rates. For penalty assessments, a high interest rate is often used to discourage people from breaking certain laws or contracts.
In conclusion, interest is the cost of borrowing money, or the income earned from lending money. The rate of interest is highly dependent upon the macroeconomic policy set by the Federal Reserve’s Federal funds rate. It is also affected by the type of interest being applied (simple or compound), the amount borrowed and the duration of the loan. Interest is commonly seen with credit cards, mortgages, car loans, private loans, savings accounts and penalty assessments.