What is an interest rate?
• Besides the security that comes from keeping your money with a large, federally-insured lending institution, the other main benefit of a savings account is the interest that you can collect on the money you have in your savings account. For the privilege of using your money to lend to others, banks will pay you a percentage of interest on the money that you choose to keep with them. For instance, if your interest rate is 1% and you have $1,000 in your account, then you will earn $10 each year that you have your money in the account. While this may not seem like a lot, the more money that you keep in your account and the higher the rate of interest that you receive, the more money that you will add to your account. The interest rate that you receive will depend on the bank you choose as well as the type of savings account you open.
Those in the money lending business have the legal right to charge borrowers an additional fee for their services. For instance, if Jim borrows $100 from Jeff, that money would be considered the ‘principal’ amount of the loan. Jeff can ask Jim to pay back the principal plus $10, which would be considered an ‘interest’ payment. By dividing the $10 interest amount by the $100 principal amount, the result is a percentage called the interest rate. In this case, 10 divided by 100 yields an interest rate of 10 percent. The interest rate of a loan is usually calculated as an annual figure, even if the terms of the loan call for a different repayment schedule. Loans for vehicles are often advertised as having a 2.9% Annual Percentage Rate (APR), even if the actual payments are spread out over 5 years. This interest rate indicates that for every $1000 loaned for the price of the car, the lender will receive an additional $29 in interest payments. This amount is added to the borrower’s monthly i
