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Compound interest

If your borrowing money…read this first.Every one that borrows money whether is it from a bank or a private lending institute pays interest.

Author: Serena Gausel

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Interest is basically a fee charged for using someone else’s money.It is a percentage charged on the principle amount for a set period. Usually over a year. (Annually).

Compound interest is the concept of adding accumulated interest back to the principle.

So that interest is earned on interest from that moment on.This interest is on the principle amount is called compounding interest. Compound interest is paid on the original and on the accumulated past interest.

If you are borrowing money or have investments, you will need to know how much you will be paying, above the cost of the principle amount on a loan or mortgage.

Interest rate must be comparable in order to be useful, the interest rate and the compounding frequency must be disclosed. Since most people quote on an annually basis. Financial institutions disclose a comparable yearly interest rate on deposits or advances.

Compound interest may also be referred to as Annual percentage Rate, or Effective interest rate. And Effective annual Rate.When a fee is charged to obtain a loan the Annual Percentage Rate (APR) usually counts that costs as well as the compound interest converting to the equivalent rate. These are government requirements assist consumers to compare the actual cost of borrowing money.Compound interest may be contrasted with Simple Interest, Where the interest is not added to the principle (there is no compounding)

Compound interest predominates in finance and economics. Simple interest is used less frequently.Here is a basic formula.

P is the principle. (The initial amount you borrow or deposit)

R is the annual rate of interest (percentage)

N is the number of years the amount is borrowed for/ or deposited.

A is the amount of money accumulated after a number of years. Including interest.

When the interest is compounded once a year.A=P (1+ r) n

If you borrow for 5 years then the formula is,

A = P (1 + r) 5

This formula generally applies to both money borrowed and invested.

Always check out all of your options and see a professional advisor prior to making any investments.

About Author

My aim is to give you the knowledge required to make sound judgements when it comes to procuring your first loan, or refinancing an existing loan.

http://www.1stop-finance.info

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