    |
INTERESTWhenever you use credit, whether it is a loan or obtaining merchandise, you will be charged interest for the use of that money. For example: if you were to borrow 100 dollars at 10 per cent interest you will have to repay that 100 dollars plus 10 more dollars. Why? 10 per cent interest means you owe 10 cents on every dollar. 100 x .10 = $10. The loan amount was $100 + $10 interest = $110. This is called simple interest. Compound interest refers to the fact that whenever interest is calculated, it is based not only on the original principal, but also on any upaid interest that has been added to the principal. The more frequently interest is compunded, the faster the balance grows. Interest rates must be comparable in order to be useful, and in order to be comparable, the interest rate and the compounding frequency must be disclosed. Since most people think of rates as yearly percentage, many governments require financial institutions to disclose a comparable yearly interest rate on deposits or advances. Compound interest rates may be referred to as Annual Percentage Rate, Effective interest rate, Effective Annual Rate, and by other terms. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate. These government requirements enable consumers to compare the actual cost of borrowing. Compound interest predominates in finance and simple interest is used infrequently. If you want to learn more on how to calculat the different forms of compound interest refer to this article: http://en.wikipedia.org/wiki/compound_interest . The concept of interest is a key concept that should be researched and understood.
|
