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Interest: Explained


What is interest?

Interest is the cost of borrowing money or the amount you are charged for using someone else’s money. It is important to remember that interest will be charged any time you borrow money. Some examples of this are loans for a car, home, or even unexpected expenses.

When you are opening an account or loan, it is important to understand the interest rates that are associated with that particular account.

What is an interest rate?

An interest rate is the amount you are charged for borrowing money. When you are getting a loan or making a large purchase, part of your payments will go towards interest and that is determined based on the interest rate. The rest of your payment will be applied to the principal, which is the actual cost or value of the item purchased.

Types of interest

Going a step further, there are two different types of interest: simple interest and compound interest. These types of interest are how financial institutions calculate what is owed.

Simple interest is calculated one time a year and is based on the principal balance owed. Typically, simple interest is associated with student loans and mortgages.

Another type of interest is compound interest. Compound interest is paid on the principal amount and for the previous pay period. The main difference is compound interest is calculated multiple times per year compared to simple interest only being calculated once per year.

Compound interest is oftentimes associated with credit cards. Depending on the credit card, compound interest can be calculated daily or monthly. It is important to understand the details associated with your credit card and Simmons Bank offers a variety of cards to choose from.

Let’s review:

Pay attention to the details. Every account is a little different and interest rates can be subject to change. It is important to know the details associated with your account to avoid any unexpected changes to your bill. If you have any questions, please contact Simmons Bank!

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