The dictionary defines interest as a charge for a loan, usually a percentage of the amount loaned. Sounds simple enough, and it would be if that was all there was to it. The method used for accruing interest on a savings account is different from the calculations used to figure interest on a Visa or Master Card. And when it comes to mortgage loans, the interest rates are entirely different.
Interest can be calculated yearly, bi-yearly, quarterly and even daily
Savings, CD, money market and other programs offered by financial institutions use low basic types of interest; simple and compound.
Simple interest is exactly what the name implies. A predetermined percentage (usually somewhere around .5 to 1 percent) of the principal (money you deposit) is added to your balance annually.
Compound interest works the same way, except that the balance is figured by adding the principal to the interest already accrued. So each year, as your balance goes up, the amount of interest you receive goes up as well.
There are variations of compound interest, as well. Interest can be calculated yearly, bi-yearly, quarterly and even daily. Each of these methods provides slightly different amounts of interest, which, over a period of time, can really add up.
Credit Card Interest
Credit cards use an annual percentage rate or APR to calculate the interest rate charged on your monthly outstanding balance. APRs can vary widely depending on the lender. The following is a list of various kinds of APRs and how they are used.
the percentage of interest charged on a normal credit purchase
Cash advance APR:
the rate charged when credit card users pull cash out of their cards
Balance transfer APR:
the interest rate on balances moved from one credit card to another
the interest rate changes depending on the outstanding balance ($1 to $500 is 14 percent, $501 and up is 18 percent)
the interest rate is raised as a penalty for repeated late payments
Introductory or delayed APR:
the rate is set up to entice new customers to sign up for a credit card. The company offers either a low initial interest rate or no interest at all for a limited time, after which the rate goes up
the rate will usually remain constant
the rate will adjust up or down depending on a variety of things, the market, your balance, etc.
One or several of these types of APRs may be used on any individual credit card. A close examination of the fine print on a credit application will disclose this information.
Yes, it's boring. Yes, it's hard to understand. Yes, a lawyer probably wrote it. But in order to protect yourself and stay aware of what interest rates you could be charged, you should check your bills each month. Keep a record of the APR each credit card company is charging you each month. If it goes up for some reason, you many want to look into paying it off or transferring the debt to a lower interest card.
Sometimes picking a mortgage is tougher than picking a mate. It doesn't help that lenders often market comparable interest rate loans with different catch phrase names. Below are the five basic interest-type mortgage loans and a brief description of how they work.
This is the most stable of the interest rates. It is guaranteed to remain the same regardless of whether the market goes up or down.
This rate is tied to the market. If rates in general go down, your rate will go down. If rates go up, however, be prepared to pay more.
This rate gives you a special lower initial rate for a limited amount of time before the rate returns to normal.
This loan has a limit to how high it will be allowed to rise over a certain period of time, thus giving it some degree of reliability.
You pay a set percentage above the base rate for either a set amount of time or the full life of the mortgage
It may take some time and a little research to shop and compare interest rates, but in the long run, you can be assured that your efforts will pay off. For a free online quote go to our home loan center