Everything You Need to Know About Interest Rates – Our GuideMar 26, 2020
Most businesses offer transactions that enable the purchase of previously unattainable products. The process is possible through various payment programs with interest rates.
If you’re new to the financial literacy world, you might have come across the term interest rates. Being well-informed and knowledgeable about interest rates can help save you from bad credit loans that could drain your pockets empty. However, there’s also a bright side with interest rates that let you earn money through different investment schemes.
In a nutshell, interest refers to the sum of cash earned through an investment or the price you pay for loaning money. Interest rates, typically expressed as a percentage of the initial amount, are often dictated by a country’s prime rate.
SARB: South Africa’s Financial Dictator
The South African Reserve Bank, commonly shortened as SARB, is responsible for dictating the central lending rate of banks. Because of that, it influences the interest rates that banks offer their clientele.
As an independent government-backed organisation, SARB intends to help the South African economy thrive using its power to increase or decrease interest rates.
Interest Types You Need to Know
Interests have various types, but there are ultimately two main categories: compound or simple and adjustable or fixed rates. The differences in the interest rates according to each group are discussed below. It is crucial to study the differences between each to choose cash loans that offer the best interest rates for your needs.
Compound Vs. Simple
Simple interest rates use simple high school math to calculate interest. For example, if you invested R1000 for five years at a 10 per cent annual interest rate, you will earn a total of R500 or R100 each year.
Compound interest is different as it takes into consideration the interest as a form of the principal amount for the succeeding years to come. For example, if you invested R1000 at a 10 per cent annual interest rate, you’d receive R100 for the first year. However, the computation for the succeeding years differs from simple interest rates because you also consider the added interest in the calculation.
With the example in the previous paragraph, the interest rate for the second year would be 10 per cent of R1100, which is the total value of the initial investment and the interest earned. The resulting interest for the second year would be R110, which would compound to a total investment of R1210. The computation for the succeeding years follows the same format.
Adjustable Vs. Fixed Rates
Adjustable and fixed rates refer to the variability of interest rates. Fixed rates, as the name implies, remain the same throughout the contract period regardless of the economic and geopolitical influences. Adjustable rates differ because they change.
Both types are advantageous depending on the situation on the economy. Adjustable rates are favourable options if the interest rate of the loan decreases during the contract period. Because of that, you pay less money for interest. Similarly, fixed rates are the best choice if other interest rates increase over time, but your fixed rate means you’d still pay the same amount because of the unchanged interest rate.
It is vital for a financially literate person to know more about interests and how it can help them achieve financial stability. When you choose a fast loan program, it is imperative to study how its interest rate fares against the competition.
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