Lenders charge two types of interest to earn money on borrowed amounts: simple or amortized. Short-term loans, like payday loans, often have simple interest, while long-term loans, such as mortgages, typically have amortized interest. Understanding how interest works is crucial in managing your finances effectively.
CDs (Certificates of Deposit) offer fixed interest rates, making it easier to calculate interest compared to other types of savings accounts. With a CD, you deposit a fixed sum of money for a specific period, and in return, the bank pays you interest at a predetermined rate.
Compound interest is an exciting concept that can significantly boost your savings over time. It is the interest calculated on both the initial principal and the accumulated interest from previous periods. This compounding effect allows your money to grow exponentially.