What is Interest? Your Ultimate Guide to Understanding Interest

What is Interest? Your Ultimate Guide to Understanding 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. You wish to purchase something but don’t have the necessary funds, so you establish an agreement with a bank, credit card, or some other lender. You get the money then must pay the loan back over a period of time.

Understanding Interest on Debts : Mortgages

First let’s talk about mortgages, the type of loan where you’ll typically pay the most interest. With a mortgage, people often make the mistake of thinking that their payment is going mostly to the principal (loan balance).

Credit Cards

Now let’s talk about credit cards, the loans that most people will pay interest on. Credit cards are a little different because they are revolving credit, meaning that the amount of credit extended can be borrowed again once paid. They are also different in that the interest on any balance carried is charged daily.

Personal Loans

Personal loans are a big category and can vary greatly depending on the type of loan. However, there are some basic things to keep in mind when you are looking at taking out personal loans, and as always, understanding that interest is key to Money Earned through Money Saved.

Student Loans

Student loan debt is fast becoming a crisis to rival credit card debt. Currently, more than $1.48 TRILLION is owed by about 44 million current and former students in America. This means young people are saddled with $20k, $30k, $50k, even $100k in debt by the time they graduate before they even think about buying a car or a house.

Understanding Interest on Assets Checking/Savings Accounts

The first is with basic checking and savings accounts. You may not realize it (because it’s generally very small), but many checking accounts and all savings accounts actually earn interest for you.

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