If you’re like most people, you’ve probably heard the term “interest” before. But do you really understand what it means and how it works? Interest is a fundamental concept in finance, affecting everything from loans and credit cards to savings accounts and investments. In this article, we’ll explore the basics of how does interest work, the different types of interest, and how interest income can impact your finances.
How Does Interest Work?
Interest is essentially the cost of borrowing money. When you borrow money, whether through a loan or credit card, you’re charged interest on the amount you borrow. This interest is typically expressed as a percentage of the total amount borrowed, and it can vary depending on a number of factors, such as your credit score and the length of the loan.
On the other hand, when you save money in a savings account, you earn interest on the balance. The interest rate on savings accounts is usually much lower than the interest rates charged on loans and credit cards. However, the interest you earn on your savings can compound over time, allowing your savings to grow.
How Does Interest Work On A Savings Account?
When you deposit money into a savings account, the bank pays you interest on the balance. The interest rate on savings accounts can vary from bank to bank and can depend on factors such as the current market conditions and the bank’s policies. Here are some things to keep in mind when it comes to how does interest work on a savings account:
- Interest is usually calculated on a daily or monthly basis, based on the balance in your account.
- The interest rate can be fixed or variable, meaning it can change over time.
- The interest you earn on your savings account is usually lower than the interest rates charged on loans and credit cards.
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