interest is the income that you get when you borrow money for a certain period. Interest is for the creditor (the one who has something to receive) a compensation for the time he will not use the borrowed money.
On the other hand, whoever makes a cash loan or makes a purchase on credit will generally have to pay an surcharge for the use of the money or for the installment of the entire value of the asset. This addition is also called interest.
To determine the amount of interest, percentage rates (interest rates) set by the lender are defined.
Interest rates are calculated according to certain factors such as current inflation, what was agreed in the contract or the risk of the loan to the lender.
Rates can be higher or lower in proportion to the size of the risk.
In Brazil, banks use a basic reference rate, created in 1979 by the Central Bank of Brazil, called the Selic Rate (Special System for Settlement and Custody). This rate is also used in determining interest rates for trade.
In the financial market, there are several types of interest: simple interest, compound interest, nominal interest, default interest, real interest, revolving interest, interest on capital, among others.
simple interest
Interest is considered simple when the interest rate is set from the initial amount of the loan.
Compound interest
The compound interest system, on the other hand, consists of defining the percentage of the interest rate according to each period, this new value being added to the initial value so that a new calculation is made in the period Following.
In other words, compound interest is “interest on interest”.
This is a more common interest rate system in the financial system, therefore more useful for calculating everyday situations.
Learn more about the meaning of compound interest.
