You’ve probably heard of interest rates, haven’t you? Despite being a popular term, not everyone knows exactly what interest rates are. After all, how to calculate them? What is their purpose?
Thinking about the importance of this topic, we created this article. Throughout the text, you will see what the main types of interest are, how they work and how they affect your pocket and your investments. Come on?
What is interest rate and how does it work?
First of all, you need to see interest as a relationship between an amount of money and a certain period of time.
So, in a nutshell: interest is a remuneration in the form of a percentage paid to those who provide a loan to value ratio or make an investment, for example.
In practice, they work as a compensation for the time the money was borrowed or invested.
Here’s just one example: imagine you borrowed R$5,000.00 from the bank. The agreement in the contract is that you return the sum of the interest in 1 year. So, when returning it to the institution, you will pay an amount above what you borrowed.
Let’s say that, in this case, after the agreed 12 months you paid back R$5,800.00. Therefore, the interest rate percentage in this example was 16% per annum.
Did you notice here? The interest rate is directly linked to the difference between the amount borrowed and the amount returned. In the example we used, the difference between the initial amount and the amount paid 1 year later was R$800. We can say, then, that these R$800 were the interest accrued in the period.
It’s not that complicated, agree? It is very important to know how an interest rate works because they are present in different moments of our day to day, such as overdraft, credit card, financial applications , loans and so on.
Understand what are the main types of interest
We’ve given an example just now to help you understand how the interest rate works in the most basic way possible. But what not everyone knows is that there are different types of interest. Check it out:
Simple interest is negotiated in advance and does not change over time. They are only reflected in the initial loan or investment amount.
This type is also known as “interest on interest”, that is, they continue to act throughout the duration of the loan, debt or investment. In this way, the sum is made on the initial amount and also on the interest of the previous months.
It is this type of interest that terrifies many people in debt, especially on overdrafts, because it causes a snowball effect in which the longer the debt remains, the greater the amount to be paid.
late payment interest
Interest on arrears or moratorium recurs on the amount according to the period of delay. That is, those who do not pay the agreement within the deadline must bear this additional compensation.
Nominal interest involves monetary corrections on the amount in question. A good part of the financing is calculated taking into account this type of interest, because it considers the current inflation.
They work in the opposite way to nominal ones — they do not include monetary correction and inflation in their calculation. Consequently, if inflation in a period equals zero, both nominal interest and real interest will have the same value.
It is nothing more than a charge for late payment of a credit card bill or a loan . If possible, it is better to avoid it to stay away from financial complications. So don’t give up good personal financial planning .
Interest on equity
This type of interest is calculated based on the profit earned by a company. Generally, companies distribute at least part of this value to their shareholders.
What is the difference between fixed rate and variable rate?
Fixed and variable rate are terms widely used in housing finance, but they also have a lot to do with other areas. If you intend to invest in Treasury Direct securities , for example, it is worth knowing them more deeply.
On trades made with variable rates, the interest charged may vary over time. With this type of rate, it is practically impossible to know exactly which direction the interest will take. It is an uncertainty that can bring good or bad results, depending on the variations that occur.
We can say that investments classified as post-fixed operate very similarly to those rates.
For example, a post-fixed Treasury bond may be linked to the Selic rate. And therefore, if the Selic rate falls, the Selic Treasury ‘s profitability also falls.
As its name suggests, the fixed rate is the opposite of what we just explained in the topic above. When investing or taking out a loan , you already know what interest rates will be applied. That is, there are no negative or positive surprises — you can predict everything and plan accordingly.
In the universe of financial investments, they work in the prefixed style because you can know precisely what the profitability will be.
Therefore, as much as the market and economy undergo major changes, fixed rates are maintained throughout the contracted period. It is a better option for those who prefer not to take risks of this type, do you agree?
However, it is important to pay attention to what happens in Brazil and also abroad, as events can disrupt the income achieved with the fixed rate. For example, if inflation rises too much, money applied at a fixed rate is likely to be worth less when redeemed.
Selic rate — learn about the basic interest rate
The Selic rate is also known as the basic interest rate in our country. No wonder you often hear comments about her in the newspapers.
As you can imagine, it is of enormous importance in the Brazilian economy, as it has an impact on other interest rates, in addition to being one of the main indicators used in Fixed Income securities .
The Selic value is defined by the Central Bank itself, based on the meeting of the COPOM (Monetary Policy Committee) which takes place every 45 days. It is based on this rate that banks are based on to define the interest that will be charged from their customers on loans, for example.
How do interest rates influence your pocketbook?
Interest rates are present in everyday life more than we can imagine. As we explain throughout the text, they relate to loans, credit cards and basic items that we consume in our routines.
For example, if you use the famous overdraft, know that the interest will act on your debt until you pay it in full.
This is where many people get bogged down, as they are unaware or ignorant of the power that an interest rate has, especially over time.
In addition, they also act in the investments we make. Choosing between a fixed or post-fixed rate, for example, can be decisive for the profitability of your bonds to be positive or not.
Therefore, it is important to keep an eye on the changes they present and also the advantages of each one within a specific scenario. As we talk so many times around here, knowledge and planning are the key to making good investments.
Take advantage of our free courses, portfolio, reports and e-books to start investing the right way and make interest allies in your pocket!