Interest rate

An interest rate is a cost of borrowing money or different assets paid by a lender to a borrower. It is often expressed as an annual percentage of the principal. Interest rates are charged for loans, mortgages, credit cards and unpaid bills. Central banks lend money to commercial banks at an interest rate known as the base rate. This base rate is the most important interest rate because it tends to influence all the other interest rates in the economy. There are two types of interest rates, that is simple interest rate and compound interest rate.

Simple Interest:

Simple Interest = Principal * Rate * Time

Example, suppose you borrow $1000 at a 7% annual interest rate for 2 years, then the simple interest rate is equal to ($1000 * 7 * 2)/100 or $140.

Compound Interest:

It is the process of earning interest on principal plus interest that was earned earlier or accrued interest.

Compound Interest = Principal * (1+Rate)^Time

Example, Suppose you borrow $1,000 at a 7% annual interest rate for 2 years, then compound interest rate is equal to {1000 *(1 + 0.07)^2} or $144.9.