Important Financial Concepts and Terms
- What is interest?
Interest is an incredibly powerful concept, and can work to your benefit or detriment. If you have money and are saving money, a bank may pay you interest on your money in exchange for letting the bank hold on to it for you. On the other hand, if you need to borrow money, or use a credit card, a bank will charge you interest to do so.
- What is compound interest?
Compound interest is a powerful economic force in which your money gains interest, and then more interest on the interest. So, you start making money on money that was paid to you on your initial deposit. Consider this example: In this example, in Year 1, you start with $500. The interest rate is 5%. You earn $25 in 1 year. This brings your total to $525. In Year 2, you start with $525. The interest rate is 5%. You earn $26.25. This brings your total to $551.25. In the 10th year, you start with $756. The interest rate is 5%. At the end of the year, you have $814.45. That is a total gain of $314.45.(excludes any taxes paid)
- What does the PRIME Rate mean?
Prime Rate is an interest rate used by banks. Generally only individuals or businesses with the highest credit ratings will receive a prime rate. Some variable interest rates are sometimes expressed as Prime plus or minus a certain percentage.
- What does APR stand for?
The Annual Percentage Rate, also known as the APR, is a rate that may differ from your "advertised" interest rate. APR's take into account all fees and/or additional charges that may be associated with the money or credit you are borrowing. APR's are a good way to compare loan options and lenders.
- What does LIBOR mean?
The London Interbank Offered Rate, also known as LIBOR, is a rate that is based on the interest rates that banks are offering funds to other banks who participate in the London wholesale money market. Historically LIBOR is slightly lower than the Prime rates.
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