The post talks about what is interest and its meaning in financial terms. It tells the difference between the common kinds of interest rates and their real-world applicability.

What Is Interest? Here Is a Simple Overview for Readers

Interest is a kind of charge that is levied either on borrowings or on savings. So, both loans and savings carry a rate of interest.

A person, for example, may take a loan/debt from a bank or a financial institution. It can be a home loan, a student loan, or a car loan. Then the lender will charge a certain amount of interest on the debt.

If a person saves money and creates a high-yield savings account then the bank will provide interest at the agreed rate.

So, interest is the amount paid by the user for borrowing a fixed sum of money. When we talk about savings and investments, interest is the return earned by an individual.

Interest Rates In Case of Borrowing and Saving

On behalf of borrowers, interest is evaluated as an annual percentage (on the total amount of the loan). This specific percentage is called the rate of interest in simple terms.

When we invest or save, the interest is usually called APY (Annual Percentage Yield).

Therefore, by opening a high-yield savings account with a bank, the user receives quarterly interest to their account. And if you will take a loan facility from the bank then you’ll have to pay interest.

When a person borrows then part of the payment goes towards the principal amount and another part is the interest amount.

Learn More on Interest Rates

Are All Interest Rates Same?

Interest rates are of different kinds. They can be fixed as well as variable. So, it all depends on the kind of financial product that one is accessing.

Usually, in high-yield savings accounts, the rate of interest is not stable. The rates depend on several market conditions.

The interest rate calculation is processed with two different traditional methods (they are simple and compound interest methods).

How Interest Is Calculated? Learn By Example

Let’s say, you open a savings account that offers 5% APY. You have a total of 20,000 dollars in your account. Here you will get 1,000 dollars as interest amount (after one year).

Another example is if you borrow 10,000 dollars (at 10% for 5 years). If the compounding is done every month then you’ll have to pay an amount of around 2,748 dollars towards interest. The calculation detailed over is the whole amount of 5 years. It doesn’t include the principal amount. For full settlement of the loan, you’ll have to pay the principal plus interest amount.

What Is Interest – A Final Summary

For sure, one of the basic concepts of finance is “interest”. If a person knows the exact way to calculate interest rates then it becomes very easy to make financial decisions. The world of borrowing, investing, and saving revolves around rates of interest. Nowadays, there are really good online financial tools that help to calculate interest rates very smoothly. For more useful finance information make sure to access Financereview.Org.