Basic Financial Terms
Interest Rate: | Interest is the amount paid for the use of money for a certain time. Although interest rate is typically quoted as a yearly figure, the actual amount of interest paid per year can be more, depending on the compounding period (see below). | |
Compounding: | Compounding is about interest on interest. When the interest is added to the principal to generate further interest, the interest is said to be compounded and the frequency this happens is called the compounding period. Interest can be compounded yearly, monthly, weekly, or even continuously. | |
Points: | Points are one of the ways for lenders to cover the costs of processing the loan. Quoted as a percentage number, this is the amount added to the principal of the loan. For example, if you borrow $100,000 with 2 points, you owe $102,000 the moment you receive your $100,000 loan. This is generally accepted in return for a favorable interest rate. | |
APR: | Loans sometimes involve additional cost such as points and other fees, which vary from lender to lender. In order to compares loans, one should use the Annual Percentage Rate, the equivalent interest rate after all the added cost being considered. | |
Annuity: | A fixed annuity is a fixed amount paid at regular intervals. In spite of its name, this interval does not have to be a year. Also the amounts may be variable, in which case it is called a variable annuity. | |
Money Factor: | A term commonly used in auto leasing industry. Under typical auto leasing terms, the interest rate can be approximated by the money factor multiplied by 24. When a dealer quotes a money factor k, the customer should have the confidence of knowing that he/she is getting an interest rate slightly better (lower) than 2400 k %. |