What is interest/interest rate?

Question

Can someone explain to me what interest/interest rate is when it comes to credit cards or buying a car & give me some examples? I don't understand. TY!!!

Answer 1

I am actually from Mars - so I am not quite familiar about where to seek some rudimentary day-to-day information about earth. You seem to have the same problem. However through my conversations with the humankind, I have been led to believe that the following websites seem to be a good starting point:

www.yahoo.com

www.google.com

http://en.wikipedia.org/wiki/Credit_card...

Answer 2

Interest is the fee you pay for borrowing money.

The interest rate, multiplied by the amount borrowed, determines how much the fee is. The interest rate is given as an annual (yearly) rate, which must be converted to a periodic rate when calculating your payment.

Example 1

You get a credit card with a 12% interest rate and monthly payments. Since you will make 12 payments in a year, the interest rate for each payment is 12% divided by 12 months = 1% per month.

Now assume you spend $2,000 and charge that amount to your credit card. The credit card company lent you $2,000 to make those purchases, so now they will start paying interest on that amount. If you paid $30 the first month, that payment would be split as follows:

Interest = 1% of $2,000 = $20

Debt reduction = $30 - $20 = $10

So after the first month you would owe $2,000 - $10 = $1,990.

The next month if you paid $30, that payment would be split as follows:

Interest = 1% of $1,990 = $19.90

Debt reduction = $30 - $19.90 = $10.10

After the second month you would owe $1,990 - $10.10 = $1,979.90

Example 2

You take out a $10,000 car loan at 13% per year. You will make a payment every two weeks, or 26 payments per year. That makes the periodic interest = 13% divided by 26 payments = 0.5%. Assume you pay $200 every two weeks.

For the first payment

Interest = 0.5% of $10,000 = $50

Debt reduction = $200 - $50 = $150

So after the first payment you would owe $10,000 - $150 = $9,850

The next payment would be split as follows:

Interest = 0.5% of $9,850 = $49.25

Debt reduction = $200 - $49.25 = $150.75

After the second payment you would owe $9,850 - $150.75 = $9,699.25