What is Interest? Your Ultimate Guide to Understanding Interest

What is Interest? 

Anyone who has opened a credit card, taken out a loan, or opened a checking/savings account has been impacted by interest. The question is, do you know how interest works and how to use it to your advantage for Money Saved? See the post to  learn about interest and how it impacts various financial tools.

What is Interest?

The concept of interest is simple. Many things determine your specific interest rate on various types of loans. Your credit score  is the biggest factor lenders consider when establishing interest rates for personal loans, credit cards, and mortgages.

Understanding Interest on Debts : Mortgages

You may not know this, but with a standard mortgage, the interest is calculated monthly. The amount of interest versus principal you pay with each monthly payment can be easily calculated through an amortization schedule calculator, which may also be referred to as a mortgage payoff calculator.

Credit Cards

Now let’s talk about credit cards, the method used to calculate this daily interest is pretty confusing. Let’s start with the interest rate, which is pretty straightforward. Each credit card has an APR or annual percentage rate. To get the daily periodic rate (DPR) used to calculate interest, simply divide the APR by 365 days.

Personal Loans

Technically, everything already mentioned (mortgages, credit cards) are also personal loans, but for the purposes of this post, personal loans refer to smaller amounts of money that will be paid back within a few years.

Investment Accounts

Investment accounts work like beefed-up versions of savings accounts. Basically, you lend your money to a bank or financial company, which then invests the money in the stock market and other ventures. Based on the market and type of investment account, you earn interest on your investment

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