Interest: what it is, types, characteristics and examples

One of the most deeply rooted concepts in finance is the interest applied to different financial products. Knowing how the interest rate works can be crucial to living a positive experience in the financial market.

The interest varies depending on what it applies to, that is why there are so many different types. But so you don’t get confused, in this article you can learn all about financial interest.

If you are about to apply for a loan, it is important that you learn how to calculate the interest rate. This will help you avoid hiring fraudulent and less transparent financials.

 

What is interest?

What is interest?

Interest is an index used in economics and finance to record the profitability of a savings or the cost of a credit. That is, it is a relationship between money and time given that it can benefit a saver who decides to invest his money in a bank fund, or, which is added to the final cost of a person or entity that decides to obtain a loan or credit.

 

Characteristics of interest

Characteristics of interest

  • Interest may or may not remain fixed for the duration of the financial product.
  • When the interest is simple and applies to the payment of a loan, it will remain the same in each installment.
  • The interest is applied to money invested in bank funds or credits.
  • They apply to any type of operation, no matter if they are short or long term.
  • They can increase or decrease depending on the characteristics of the financial product to which it is applied.

 

Interest rates

Interest rates

When talking about interest, there are different variants that apply to each situation or financial product depending on its characteristics. Here are the most common interest rates.

 

Nominal interest

It is the interest rate that is applied in different periods throughout the year. They are usually found in short or medium term loans.

Real interest

It is an interest rate that is usually applied more to investments or bank funds. This percentage expresses the real gains obtained from said investment in a given period of time taking into account inflation and other factors.

Effective interest

This interest includes the reinvestment of interests and the capitalization of them annually.

Variable interest

They are interest rates that are updated monthly or quarterly depending on several economic factors. They usually apply to financial products that are paid in the long term.

Fixed interest

It is the opposite of the previous interest rate. Here the percentage remains intact throughout the entire period that the financial product is active.

Mixed interest

This is the combination of the two types of interest above, usually applied a lot in mortgage loans. It consists of providing a fixed interest rate during the first years of life of the financial product, and then a variable interest rate.

So that nothing takes you off guard, learn what compound interest is and how it works.

 

Examples of interest

credit loan

  • If you want to buy a car financing the total amount of the vehicle, you will have to pay the value of the car plus the interest applied in each monthly installment. For example, if the car costs $ 35,000 and you have to pay an initial fee of $ 20,000 and the rest of the amount in installments of $ 1,700 per month for 12 months, you will end up paying $ 40,400.
  • If you request a mini-loan of $ 2,000 to be paid within 30 days with interest of 1.1% daily, you will have to pay at the end of the term $ 2,665. The extra $ 665 will be for interest.

If you want to get immediate liquidity but you are worried about interest expenses, try an interest-free loan.

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