ABCs of Figuring Interest
How is the interest you pay or receive calculated?
How do these calculations affect your interest?
What's the difference between simple interest and compound interest?
Does repaying a loan early save you money?
Although Shakespeare cautioned "neither a borrower nor a lender be," using and providing credit has become a way of life for many individuals in today's economy. Examples of borrowing by individuals are numerous: home mortgages, car loans, credit cards, etc. While perhaps more commonly thought of as investing, many examples of lending by individuals can be identified. By opening a savings account, an individual makes a loan to the bank; by purchasing a savings bond, an individual makes a loan to the government.
As with goods and services that an individual might buy or sell, the use or extension of credit has a price attached to it, namely the interest paid or earned. And, just as consumers shop for the best price on a particular item of merchandise, so too should consumers "comparison shop" for credit — whether borrowing or lending. But comparing prices for credit can, at times, be confusing. Although the price of credit is generally stated as a rate of interest, the amount of interest paid or earned depends on a number of other factors, including the method used to calculate interest.
For More Information
Further information on the factors determining interest rates is contained in the publication, Points of Interest.