Every time you take out a loan or fail to pay off an account on time, interest is charged. But do you know what interest is?
Almost everyone has felt in their pocket how much interest costs in a particular negotiation, whether because of a loan, late payment of some debt, or purchases on installment. And you may have already noticed that in each case, they are defined differently, as there are two types: compound interest and simple interest.
Keep reading and stay on top of this subject to learn how to calculate:
What is interest, and in what situations is it applied?
Interest is basically a relationship between an amount of money and a certain period of time until the payment of a bill or debt. In practice, they work as compensation for the time the money was lent or invested.
Interest is applied in situations such as principal loans, term purchases, or investments, for example.
Know the difference between simple and compound interest
Simple interest is charged only on the initial capital, that is, on the amount of money borrowed, while compound interest is charged on the loan amount plus interest for each period. Therefore, compound interest is also called “interest on interest.”
Here are two examples of simple interest and compound interest calculations:
simple interest
Imagine that you borrow R$ 1,000 from a friend, and you will have to pay simple interest of 8% per month. To calculate how much interest you will have to pay on each installment, just do the following math:
1000 x 0.08 = 80
* 0.08 = 8%
With this calculation, you know that each month you will have to return part of the R$ 1,000 plus R$ 80 in interest.
To know the total amount of interest that you will have to pay until the debt is paid off, just take the monthly interest amount (R$ 80) and multiply it by the number of installments defined for payment of the loan.
Let’s assume you are going to pay in 5 installments. The calculation will be:
80x 5 = 400
That is, you will pay R$ 400 only in interest to pay off the loan.
Compound interest
Now imagine that you borrowed R$ 1,000 from the bank, which charges compound interest, and that you will make a single payment, referring to the principal plus interest, at a future date. In this case, the interest rate will be calculated on top of the initial capital (the loan amount) plus the amount of interest charged in the previous month, with the exception, of course, of the first installment, when the interest rate is applied only on the starting capital.
To understand better, let’s use the same example from above. Check the calculation that needs to be done in the case of compound interest:
First month:
1,000 x 0.08 = 80 → R$ 80 is the amount of interest you will pay in the first month.
Second month:
1,000 + 80 (first-month interest) = 1,080 → it is on this amount (R$ 1,080) that you will apply the interest rate to know how much you will pay in the second month. Follow the account:
1,080 x 0.08 = 86.40 → R$ 86.40 is the interest you will pay in the second month
Third month:
1,000 + 80 (first-month interest) + 86.40 (second-month interest) = 1,166.40 → the interest rate will be applied to this amount to define the amount to be paid in the third month. See:
1,166.40 x 0.08 = 93.312→ R$ 93.312 is the amount of interest you will pay in the third month.
To find out how much you will pay in total, adding the initial amount with compound interest, just use the following formula:
How does interest in overdraft work?
Despite appearing as an account balance, the overdraft is actually a type of loan and has extremely high compound interest! In comparison to the simple, an overdraft can charge an interest rate higher than 300% per year. In personal loans, for example, interest is no more than one-third of this amount. So, avoid the overdraft!
What types of loans have the highest and lowest interest rates?
There are several types of credit on the market, with different interest rates.
Payroll loans
This type of loan has the lowest interest rates on the market. The installments are paid through payroll deduction, which gives more security to the bank, so interest is lower than that charged on other loans. However, payroll loans only benefit INSS pensioners and retirees or employees of private companies that have agreements with banks to make payroll loans available to their employees.
refinance property
Property refinancing is a type of loan where the owner offers his property as a guarantee of the debt payment. In this case, if the debt is not paid, the bank may retain the property. In this way, interest rates are lower, the amounts borrowed can be higher (everything will depend on the value of the property), and the debt can be paid off in the long term, in up to 20 years.
In this case, interest rates may be even lower than those for consignment credit. The disadvantage of this type of credit is that, in case of default, the bank can take the property given as collateral. This type of loan also involves high operating costs.
Anticipate the 13th salary
In this option, the debt will be deducted from the debtor’s account even if the 13th salary deposit has not been made by the employer; that is, there is a risk that the debtor will not have the resources to pay off the loan.
In addition to the risk of not having the money to pay the debt, this type of credit may not be the best solution, as the person anticipates receiving an amount that would come at the end of the year, a period in which expenses are usually higher, with expenses for Christmas, vacations, purchase of school supplies and payment of taxes such as IPVA and IPTU.
Avoid credit card and overdraft debt.
Expert advice is never to finance anything on the card, always pay the bill in full and avoid the overdraft. Going over budget in these cases means paying annual interest rates in excess of 200%.
You noticed that banks don’t want to take risks with default and charge higher interest when there is a risk of default, right? Therefore, the tip is to offer the maximum guarantee when taking out a loan. This way, interest rates are lower, and you are more relaxed.
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