When you borrow money through a loan or credit, the interest is what you pay for using someone else’s money. It is listed as a percentage of the loan, and it is paid at set intervals. It is important to understand how interest is calculated so that you know the true cost of the loan. Continue reading to understand interest rates.
How Much Do You Pay in Interest?
To find out how much you pay in interest on a loan, you need to know the amount of the loan, the interest rate, and how long you will take to repay it. When the interest rate is higher, you will pay back more money. For example, if you borrow $100 at 5% interest, you will pay a total of $5 a year if it is simple interest.
However, some loans or credit cards have compounded interest, and these amounts grow more quickly. It is important to find out what kind of interest you are paying when you borrow money or use credit cards.
When Do You Earn Interest?
You can earn interest when you deposit money into an interest-bearing account. This could be a savings account, some checking accounts, or a certificate of deposit. The bank uses your money while it is there, and they pay you interest. You will see the transaction in your statement.
You might earn interest monthly, quarterly, or annually. You can keep it in the bank and you will earn interest on your original deposit as well as the interest.
When Do You Pay Interest?
You pay interest whenever you borrow money unless you get an interest free loan. There are a number of situations in which this occurs. An installment loan includes home, auto, and student loans. The interest is included in your payment each month.
Part of your payment will go to the principal, or the loan, and another part will pay interest. These loans usually have a term specified, which could be three years, five years, thirty years, or another specific time period.
Another type of loan is revolving debt. This includes lines of credit and credit cards. You can pay back your debt and use the money again as long as you stay below your credit limit. They usually charge interest on the money you are using rather than the entire credit line.