How Interest Works With Everyday Loans
I think the following raises some excellent points about interest. I’ve included a few of the highlights for you to get the gist of the article:
Interest is the cost of using somebody else’s money. When you borrow money, you pay interest. When you lend money, you earn interest.
There are several different ways to calculate interest, and some methods are more beneficial for lenders. The decision to pay interest depends on what you get in return, and the decision to earn interest depends on the alternative options available for investing your money.
What Is Interest?
Interest is calculated as a percentage of a loan (or deposit) balance, paid to the lender periodically for the privilege of using their money. The amount is usually quoted as an annual rate, but interest can be calculated for periods that are longer or shorter than one year.
Interest is additional money that must be repaid — in addition to the original loan balance or deposit. To put it another way, consider the question: What does it take to borrow money? The answer: More money.
When borrowing: To borrow money, you’ll need to repay what you borrow. In addition, to compensate the lender for the risk of lending to you (and their inability to use the money anywhere else while you use it), you need to repay more than you borrowed.
When lending: If you have extra money available, you can lend it out yourself or deposit the funds in a savings account (effectively letting the bank lend it out or invest the funds). In exchange, you’ll expect to earn interest. If you are not going to earn anything, you might be tempted to spend the money instead, because there’s little benefit to waiting (other than saving for future expenses).
How much do you pay or earn in interest? It depends on:
- The interest rate
- The amount of the loan
- How long it takes to repay
What do you think? Maybe you’d like to read on? Check out the full version HERE then give me a call to discuss how this might impact your own business: 0401 714 406. Alternatively, email me at [email protected].
Thanks,
Darren