Interest Rates

The term 'Interest' refers to the fee paid on borrowed assets - usually money.

The amount of interest payable is payment/reward/compensation to the lender for their trouble and foregoing other useful investments that they could have been made with the money instead.

The total amount lent is called the 'principal', which is held by the borrower 'on credit' and it is this 'credit' which incurs the Interest charge. The percentage of the loan amount (principle) which is paid as the interest fee, is known as the 'interest rate'.

The charging of interest is thought to date back to 1500 B.C., where it was carried out among the Sumerian and Egyptian cultures.

There is 'Simple Interest', where the rate is calculated only on the principal, or on that portion of the principal which remains still unpaid, or there is 'Compound Interest' where the principal alters as all interest incurred over that set period is added to the principal sum. In this instance, you are effectively paying interest on the interest already charged!

Interest rates with loans can be of two sorts - Fixed and Floating or Variable - the 1st being where the interest rate stays fixed - and the latter where the interest rate can vary - meaning you may not always know what your loan repayments will be, but you stand the chance of getting a good deal... but also an unfortunate one. Mortgages also offer other rates, such as Tracker.