What is an interest?

Interest is the cost of using someone else's money. When you borrow money, you pay interest. When you lend money, you earn interest. Interest is both the cost of borrowing funds and the profit that accrues to those who deposit funds into Saving account.

Calculé en pourcentage du solde du prêt ou du dépôt, les intérêts sont payés au prêteur par l’emprunteur dans le cas d’un prêt ou de l’institution financière au déposant dans le cas d’un compte d’épargne. Ici, vous en apprendrez plus sur les intérêts, y compris ce qu’ils sont et comment calculer combien vous gagnez ou devez selon que vous prêtez ou empruntez de l’argent. Mais avant de commencer, voici une formation premium qui vous allows you to know all the secrets to succeed in the Podcast.

Definition of interest

Interest refers to two related but very distinct concepts: either the amount a borrower pays to the bank for the cost of the loan, or the amount an account holder receives for the favor of leaving money at the bank. It is calculated as a percentage of the balance of a loan (or deposit), paid periodically to the lender for the privilege of using their money. The amount is usually stated as an annual rate, but interest can be calculated for periods longer or shorter than one year.

En réalité, les intérêts sont des sommes supplémentaires qui doivent être remboursées en plus du solde initial du prêt ou du dépôt. Pour le dire autrement, considérez la question : que faut-il pour emprunter de l’argent ? La réponse : plus d’argent. There are two basic types of interest: simple interest and compound interest.

simple interest

Simple interest, or flat rate interest, is calculated as a percentage of the principal balance of a deposit or loan. No matter how long a borrower goes without paying a debt or an account holder keeps money in the bank, interest will always be calculated from the original amount.

When borrowing: after borrowing money, you will have to repay what you borrow. Also, to compensate the lender for the risk of lending to you, you must repay more than you borrowed.

Take this example. Suppose you borrowed $1000 from a bank. If your loan generates an annual interest rate of 10% at the bank, you will repay $1000 plus 10% interest ($100). So $1 is the amount you will have to repay after one year.

Please note: The total amount of interest may be higher or lower if you borrow money over a longer or shorter period.

When loaning: If you have extra money available, you can lend it yourself or deposit the funds into a savings account, allowing the bank to lend it or invest the funds. In return, you expect to earn interest. If you don't win anything, you might be tempted to spend money instead, as there is little benefit in waiting.

Par exemple si vous placez 1 000 $ dans un compte d’épargne qui rapporte 2% d’intérêt par an, vous gagnerez 20$ d’intérêts, ce qui vous donnera 1020$ après un an. Encore une fois, l’intérêt que vous gagnez peut-être plus ou moins élevé si le taux d’intérêt change. Globalement, ce que vous gagnez ou payez est fonction du :

• Interest rate
• Amount of the loan
• How long does it take to repay

Compound Interest

With compound interest, accrued interest is added to the principal balance. Think of it as interest on interest. The formula for calculating compound interest is: A = P(1+r/n)^(nt), where A is the future value of the loan or investment, including interest; P is the principal investment amount; r is the annual interest rate (decimal); n is the number of times interest is compounded each year; And t is the term of the loan. Apparently, Albert Einstein humorously called compound interest the most powerful force in the universe.

Take this example

Looking have $5 in your savings account which pays an annual interest rate of 5%. Compounded monthly, the value of this investment after 10 years can be calculated as follows: P = 5, r = 000, n = 0,05, t = 12. We have A = 10 (5 + 000 / 1 ) ^ (0,05 (12)). The account balance after 12 years would be $10.

Factors influencing market interest rates

Like goods and services, the interest rate depends on the law of supply and demand. In other words, it is established by the market. Thus, the lower this interest rate, the greater the demand for financial resources.

Conversely, the higher it is, the lower the demand for these financial resources. However, in the case of supply, the relationship with the interest rate is direct because the higher it is, the greater the predisposition to lend money, and the lower the interest rate, the less you will want to lend money. Obtaining a point of equilibrium with the association of these two variables establishes the value of the interest rate. Although the market is not the only one that indicates its value, there are other important variables as well. These variables are:

• The real interest rate of the public debt.
• Inflation expected.
• The liquidity premium.
• Interest risk of each maturity.
• The issuer's credit risk premium.

Also, the central bank of the country sets an interest rate which affects all the above-mentioned factors. Its control allows it to apply expansionist or restrictive economic policies by reducing or enlarging it.

Types of interests

Ah, les intérêts ! C’est un sujet qui peut sembler un peu aride au premier abord, mais qui est en réalité fascinant quand on y regarde de plus près. Parlons-en de manière plus accessible et concrète. Commençons par les simple interest. This is the most basic type of interest, a bit like the children's menu of the financial world. Imagine that you lend 100 euros to a friend. You agree that he will reimburse you 5% interest per year. After a year, he will owe you 105 euros. Simple, right?

Then, we have the compound interest. This is where it gets more interesting (no pun intended!). It’s as if your interests have petty interests of their own. Let's take our example again: if your friend keeps the money for a second year, you don't just calculate 5% on 100 euros, but on 105 euros. It may seem trivial, but in the long term and with larger sums, it makes all the difference!

There are also the ifixed and variable interests. Les intérêts fixes, c’est comme un contrat de mariage solide : le taux ne change pas, quoi qu’il arrive. Les intérêts variables, eux, c’est plus comme une relation ouverte : le taux peut monter ou descendre selon les conditions du marché. N’oublions pas les pre-tax and post-account interest. Les précomptes, c’est comme payer l’addition avant de manger : vous recevez les intérêts au début de la période. Les postcomptes, c’est l’inverse : vous payez après avoir profité du service.

Finally, there are the nominal and real interest. The nominal rate is the one they tell you, all beautiful and shiny. The real rate takes inflation into account. It's a bit like the difference between your gross salary and what actually arrives in your bank account.

Ultimately, understanding these different types of interests is a bit like learning the rules of a new game. Once you master them, you can really start having fun (or at least, make your money work smarter)! Do you have personal experience with any of these types of interests?

What are the types of interest rates?

Interest rates are applied in different ways, for different periods of time. It is therefore important that you know what type of rate you are being charged. Also if the interest will be paid at the beginning or at the end of the credit. The most commonly used interest rates are the nominal interest rate and the effective annual interest rate or equivalent.

Nominal interest rate

This rate is simple interest. It corresponds to the percentage that will be added to the initial capital as compensation for a certain period of time, which does not have to be one year.

A nominal interest of 10% compounded semi-annually means that every six months the interest is paid at 5%. If the nominal interest is 12% and it is compounded every two months, this means that every two months the interest will settle at 2%. The nominal interest rate is numerically higher with the duration of the loan: 12% per year, which is equivalent to 6% semi-annually, or 2% every two months, or 1% per month.

In general, banks tell us the nominal monthly interest rate when they give us loans. They do this with the objective that we think they charge us very little money for the credit they extend to us.

Effective annual interest rate

Also called equivalent annual interest rate, this is a compound interest rate. It includes the nominal interest rate, bank charges and fees, and the duration of the transaction. This rate corresponds to the full compensation that the financial institution receives for lending us money. Like the nominal interest rate, the effective annual interest rate depends on the period over which interest is paid. Check out this article to know how to reduce your bank charges.

Il est très important que vous demandiez à votre institution financière s’il y a des pénalités pour paiement anticipé dans le cas où vous décidez d’effectuer un versement en capital pour réduire les intérêts générés par la dette. Ce que vous devez garder à l’esprit est que la pratique de l’intérêt ne se fait que dans le système financier classique. Dans the Islamic financial systeme, this practice is prohibited and considered riba. But riba is Haram. with Islamic finance, you can benefit from interest-free loans.

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