Nothing in life is free, including money. You must work for it. And if you don’t have enough, you must borrow it. Even borrowing money costs money. It’s called interest rates.
Interest rates are the cost to you of borrowing money. The lender charges you interest for using their money. It is how they make a profit from the transaction. They will charge you interest on the borrowed amount, called the principal.
Let us view a simple example. You borrow $5,000 from the bank. They charge you a 6% annual interest rate. $5,000*6%=$300. It will cost you $300 to borrow this money. In total you will pay the bank back $5,000+$300=$5,300 over the course of the year.
That is a simple interest rate. There are multiple types that exist. APR (Annual Percentage Rate), fixed, variable, and compound are other examples. APR includes the interest rate plus any other fees/costs, fixed means the rate remains the same over the course of the loan while variable means it may change, and compounding means interest is charged on the principal plus any accumulated interest.
Compounding is the most common type of interest rate we see. When your investments are compounding that is a great thing. You are earning interest on your interest. That is not the case with our loans. The more interest accumulates the more we owe 😵.
MMM tip: Do you know what your interest rate is for your mortgage or car loan? Look it up right now!
Until next week,
Dariene
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Disclaimer: This newsletter is for informational and educational purposes only and should not be considered financial, investment, tax, or legal advice. I am not a licensed financial advisor. Please consult a qualified professional before making any financial decisions.
