Money usually does not fall from the sky, it costs, it requires both work and time. And the cost of money is interest rates. See yehouda.com for an illustration
When going to a financial institution to apply for a mortgage loan or if you want to invest, usually the executives in charge of serving the customer confuse it with a somewhat confusing terminology regarding interest rates. Therefore, it is essential to master such concepts at least at a basic level.
The importance of interest rates
It is an indicator that is expressed as a percentage and is used to estimate the cost of a loan or the return on savings or investment.
The rate can be fixed if it remains stable while the investment lasts or the loan is repaid, or variable if it is updated – usually – on a monthly basis, to adapt to inflation, exchange rate variation and other variables.
There is a mixed one , which combines both with a fixed portion and another variable, assigning a percentage to each one.
Within each of these classifications
The nominal rate is the profitability or interest of a financial product month by month or in a specific period taking into account only the initial capital; that is, calculate simple interest .
The effective rate on the other hand takes into account the reinvestment of interest or return generated; In other words, calculate compound interest . .
When comparing different credits or products
It must be taken into account that a nominal rate can be converted into an effective one and vice versa, so it may be the case that some entities tell you that the rate of a credit is nominal 2.08 monthly and others which is 28% annual effective; Rates that are exactly the same.
Later you will see other types of fees that are usually handled within financial jargon.