Interest is the price that someone pays on the temporary use of someone else’s funds or more accurately, the cost of borrowed money or capital. Interest is a fee or price paid on the borrowed capital. The interest is paying for the use of others savings over a given period of time. Interest is also income to people willing to give up the temporary use of their money. By giving up savings, the saver is paid interest for the use of that money.

When you put money into a bank account or certificate of deposit you receive interest income because you are giving up the use of that money, even if the time frame in which you are giving up the use is very short as would be found in an interest bearing checking account. Interest in regards to bank deposits is the compensation that someone receives for temporarily giving up the ability to spend the money they have deposited.

Interest is a cost to the borrowers. The fee is compensation to the lender for foregoing other useful investments that could have been made with the loaned moneyTo repay a loan, a borrower has to pay interest, as well as the principal or the amount originally borrowed. The borrower pays interest, for example, if they don’t pay the entire credit card bill at the end of the month or if someone takes out a mortgage loan to buy a house, or even when someone own a business and borrows money in order to invest in machinery. Interest is both the measure of the cost of holding money and the price of credit.

Interest rate is the percent charged, or paid, for the use of money. It is charged when the money is being borrowed, and paid when it is being loaned, money is being borrowed, and paid when it is being loaned. A bank pays interest when money is deposited because the bank uses that money to make loans. The bank then charges the borrower a little more for that same money so it can make a profit for its service.

Interest rates must be comparable in order to be useful, and in order to be comparable, the interest rate and the compounding frequency must be disclosed. Since most people think of rates as a yearly percentage, financial institutions are required to disclose a comparable yearly interest rate on deposits or savings. The Truth in Savings Act requires the clear and uniform disclosure of rates of interest, annual percentage yield or APY, and the fees that are associated with the account so that the consumer is able to make a meaningful comparison between potential accounts.

The Truth in Savings Act requires is a federal law that was passed on December 19, 1991. It was part of the larger Federal Deposit Insurance Corporation Improvement Act of 1991 and is implemented by Regulation DD. It established the clear and uniform disclosure of rates of interest, annual percentage yield or APY, and the fees that are associated with the account so that the consumer is able to make a meaningful comparison when given information on or opening a new savings account. On passing this law, the US Congress noted that it would help promote economic stability, competition between depository institutions, and allow the consumer to make informed decisions.

Interest rates are expressed as percents per year. If the interest rate is 10 percent per year, and you borrow $100 for one year, you have to repay the $100 plus $10 in interest.

Annual Percentage Yield (APY) is The effective annual rate of return taking into account the effect of compounding interest. The annual percentage yield is generally used to refer to the rate paid to a depositor or lender by a financial institution. Annual Percentage Yield. The rate of return on an investment for a one-year period. For an interest-bearing deposit account, such as a savings account, APY is equal to one plus the periodic rate (expressed as a decimal) raised to the number of periods in one year. Due to compounding, the APY will be greater than the periodic interest rate multiplied by the number of periods in the year.

Regardless of whether rates are generally high or low, some rates are higher than others. Varying forms of credit have risk factors to take into account in order to determine its interest rate. The term interest rate can be used to describe not only the rate you recive for loaning out funds, such as placing money in a CD or money markt account, and for the rate you pay for borrowing funds, but can be used to describe the rate on that CD, bank account, the prime rate, fed funds rate, auto loans, etc… Interest rates will not always move in the same direction by the same amount. If the fed funds rate is rduced by ¼ % this may not lead to reduction in mortgage rates, auto loan rates, or CD rates.

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