When you take credit there is an assumption that you will repay the debt in good time and that you normally have to pay the bank or shop some additional money as well. This additional money is called interest and you may be charged additional fees on top of this.
Understanding how interest works and is calculated is important to help you build your wealth.
The basics of interest:
- When you take out credit you have to pay back the money borrowed PLUS the interest
- Formal lenders (like banks and credit providers) normally calculate interest over a year-long period. So if you pay a 10% interest rate, this means your interest will be 10% of the full amount owed for a full year.
- Some lenders charge interest monthly, this means the credit or loan costs you more as the interest is calculated per month.