Interest rates can feel very confusing and complicated, but they don't have to. Whether your bank is charging interest per annum, biannual or monthly, it's important to understand how this affects your account and the total amount owed on what frequency.
Interest Definition and Basics
Interest is an amount owed to the banking institution, based on the original amount borrowed (principal amount) on top of the principal. Midatlantic Farm Credit describes 26 different factors which affect how an interest rate is determined, including that the less frequent a payment schedule is set, the higher you can expect each payment to be.
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The Corporate Finance Institute defines an "annum" interest as a payment rate of once per year, with the interest being compounded each year. Compound interest is the concept that any unpaid interest is added to the principal amount and the sum is used to calculate the next interest payment. This results in unpaid compound interest loans increasing at an accelerating rate.
In turn, a compound savings account will grow at a similar rate, with the rate of growth being based on each successive accumulated amount in the savings account. This is in contrast to "simple" interest, which writers at Equifax describe as a set interest amount based on a percentage of the original principal amount.
Benefits of an Interest Per Annum Account
Annum interest evaluation is most frequently compound interest, instead of simple. The rate at which you calculate the principal of a compound interest account is important. The team at MoneyRates offers an online calculator you can use to experiment with different interest amounts and rates of evaluation, as well as the period of investment and the initial amount.
Trying different rates and percentages on this online calculator allows you to see that compounding an amount daily results in a significantly greater growth in the principal than annum compounding. What this means is that if you take out a loan with a compounding annum interest, you will have a full year to pay down the principal before it is evaluated and the predetermined interest percentage is applied. This gives you much more time to pay down a principal amount of a loan without the amount of interest growing, instead of a shorter period of evaluation.
By contrast, an annum compounding savings account is less appealing, because your savings will grow more slowly than a shorter evaluation period. As a result, in either a savings account or taking out a loan, banks prefer larger initial amounts for loans and deposits for annum interest accounts. This guarantees the bank a greater amount of capital one way or another to employ in their calculations.
Accounts With Interest Per Annum
This interest rate and interval can apply to savings accounts as well as loans. Due to the amount of time elapsed between interest evaluations, most banks will require large deposits or loans before they will agree to per annum interest. The team at CNBC explains that APY, or the "annual percentage yield" of an account, describes how this number determines the amount of interest you, as a savings account holder, or the bank, as a lending establishment, will earn across the course of a year.
The APY is determined through the interest percentage and rate. MoneyRate's interest calculator is an example of how this can be adjusted across time and percentage. You may be familiar with APY as an aspect of credit card specifications, and this understanding will help you with understanding credit card policies as well.
Most credit cards calculate interest as per diem compound interest. This translates to a practice of adding any unpaid interest at the end of a grace period to the principal amount and the next day calculating a new amount of interest based on the total of the principal plus the unpaid interest from the previous day.