Interest rate

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What is the interest rate?

The interest rate is the percentage of money obtained for each capital unit invested, that is, the extra payment that is made for using an amount of money and benefiting from it.

In the case of a credit or a loan, the extra percentage that the borrower must pay the lender for said operation is considered the interest rate. On the other hand, if we talk about a deposit, the amount of money that the company or the person receives, for making that amount of money available, is the interest rate.

Interest rate characteristics

Between the main features of the interest rate we can highlight that:

Promote the incentive, since with a high rate significant savings are generated.
It serves as economy indicator from a country.
It can be fixed or it can vary depending on the type of interest rate used.

Interest rate types

The interest rate can be classified into the following types:

Nominal: It is the type of rate that is capitalized more than once in the year, that is, it is established in different periods.
Effective: This rate exposes the nominal interest once a year, taking into account the periodicity with which it is paid. Includes capitalization and reinvestment of interest.
Real: It is one of the most important rates, since it specifically determines the real interest that is earned by investing, since inflation reduces the ability to buy and thus money loses its value.
Variable: this rate is updated monthly or, in some cases, quarterly.
Fixed: This rate remains fixed throughout the life of the loan and there is no way for it to vary.

Interest rate examples

Here are some examples of situations that involve an interest rate:

When requesting a loan, For example, to finance the education of the children or some illness, then the loan must be repaid plus a certain interest rate.
If a company finances a car for one of its workers, the employee must then pay the amount of the car plus the type of interest rate indicated.

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