The interest rate per annum is the total interest rate over one year. If your loan rate is charged per month, you can multiply that rate by 12 to arrive at the annual interest rate. However: what you earn or pay on an amount will depend on whether you are charged simple interest or compound interest.
Simple Interest Per Annum
If you take out a loan for $100,000 and are charged 0.5 percent interest per month, and that loan is due at the end of one year, your annual interest rate is 6 percent. In this calculation, you are charged 0.5 percent for one month, multiplied by 12 months, which equals 6 percent. The amount you pay is 0.5 percent of $100,000 each month, or $500. Over one year, that equals $500 multiplied by 12 months, or $6,000.
Compound Interest Per Annum
In an investment situation, you might receive interest on the interest you earn on an account, referred to as compound interest. If you invest $100,000 at 0.5 percent per month, and that interest is reinvested monthly, you will earn 0.5 percent on the principal plus the interest. At the end of one year you will have $106,167.78 in your investment account, which means you will have earned about 6.2 percent on your principal.
