Interest rate part 2

We need to know more about the interest rate to understand what the cost of money really means.

One thing we need to know is what time period it covers – is the rate annual?  Am I paying 10% per year?  Per month? Per day?

If the rate is 10% per year, then $100 borrowed on January 1, year 1 and paid back on January 1 year two is calculated like this:  $100 times 10% (or .10) = $110.00.  

It costs $10.00 to borrow $100.00 for 1 year.

If the rate is monthly, then to borrow the same $100.00 paid back in 1 year could look like this:

Then we calculate the interest like this: $100 X .10 X 12 months = $120.00 plus the original loan amount (the principal) of $100.00 and we see we have to pay back $220.00.  WOW.  10% per month is WAY different than 10% per year.   It’s WAY more expensive.   Most of the time the interest rate stated is an annual rate.