What is it for and why? I found a lot of questions on interest rate but not what interest itself is
Thanks in advance 🙂
Edit: Thank you for all the replies i am now a financial god of wisdom, i’m not going to reply to unless something is unclear to me but comments will all be read
In: 9
Interest is, simply, the price you pay to someone else for them lending you money. (Or in reverse, the amount you charge someone else for lending them money. Same thing, opposite POV.)
A simple example: “I will lend you $100. For every day until you pay me back, the amount you have to pay me back goes up 1%.”
The initial amount, the $100, is the PRINCIPLE.
After the first day, it would go up to $101. Then that amount increases by 1%, so $102.01. Then the next day, $103.03, and so on.
In real life: When you use a credit card, a bank is lending you the amount of money you need to make that purchase, and charges you interest on that amount until you pay it back. It tracks each individual purchase to ensure that interest is being charged correctly.
On the flip side, when you deposit money with a bank, you are effectively lending them YOUR money. They will pay you interest on your deposits (or else they used to. It’s rare anymore, and if they do, it’s a paltry amount.)
Most of the time you will hear the term APR, or Annual Percentage Rate, which is the interest rate for an entire year, but different types of loan may calculate interest daily, weekly, monthly, or yearly, even if they TELL you the rate over the course of a year, there is math underneath happening.
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