When you have borrowed money from a lending institution it is a common fact that this debt needs to be paid. You are usually charged with an interest on your account. Interest rates are simply a certain percentage added to the amount that you owe. It is the fee that you pay for using the money that you borrowed. The interest rate grows until you pay your debt in full. Every loan, mortgage, credit card or medical bill that you receive will have an interest rate. There are two basic types of interest: simple interest and compound interest.
Simple interest is also known as “flat rate” interest. It is a percentage taken on the principal balance that is you owe.

The formula use for calculating this would be:

Interest= Principal x Rate x Time
If you have a loan for $10,000 for example, your annual interest rate is 15% then you owe $1,500 after one year:
$10,000 x .15= $1,500
If it takes more than a year (let’s say 2 years) for you to pay the loan then the computation will be slightly different:
$10,000 x .15 x 2= $3,000

Although this examples quote an annual percentage this may be broken down into monthly or quarterly percentages.

Compound interest adds more than the original amount and interest. Some other fees are added too in the balance. It is simple paying interest on interest per se. Most financial products usually use compound interest so bear in mind to pay your debts as soon as you can. It is wiser to pay more than the minimum monthly payments on your debts or you will be overwhelmed by your compounded interest.

There are terms that you need to know in order to have a better grasp of your interest rates this are:

• APR (Annual Percentage Rate): These are standardized computations that provide borrowers with a bottom-line number so that they can compare the rates that they are being charged by potential lenders.
• Prime Rate (Prime Lending Rate): This is the interest rate that commercial banks charge their customers who have good credit standing (high credit score).  These banks best customers are those who belong to large corporations. Because these large corporations have little chance of none repayment they are charged with a lower rate. Prime rate is used to calculate the interest rates that are charged to an individual lender on credit cards and loans.
• Fixed Rate: Is a loan on which the interest rate does not change during the entire term of the loan. There are instances when this can increase if the borrower did not pay on time.
• Penalty Rate: This is the amount that you pay if you are late with your payments. It differs from interest rates because of the penalty element. This is significantly altered when there is a change in the institutional rates. The penalty interest rate is fixed by the Attorney-General under the Penalty Interest Rates Act of 1983. He reviews the rates based on institutional rate together with the added penalty element. The current penalty rate appears on major newspapers every Monday under the Law List. Even if you have made your payments on time through a lender you can still be subjected to a penalty rate if your contract indicates a “universal default”. Universal default allows creditors to review customer’s credit report on a regular basis, if there is an instance when their credit score has been negatively affected then they can charge a higher interest rate.
• Variable APR/ Variable Rate: It is any interest rate that changes on a periodical basis. The change is determined by an outside indicator such as the prime interest rate. Movement above or below these levels are prevented by a predetermined ceiling rate also known as adjustable rate.

In addition to the common terms that a borrower must understand he must also know about the common types of debt.

Debt is often categorized as secured and unsecured. These terms depend on the presence of collateral of the debt. Collateral acts as the security on the loan or credit. A secured debt is one which involves collateral such as a house or car while unsecured debt for example is that which involves the use of your credit card.

Debt can also be categorized as installment or revolving. The payment schedule is the main issue here. When you are making a monthly car payment for example you are making an installment debt since the payments are made in installments. Revolving debts have to do with credit cards since the balance to be paid changes or fluctuates depending how many charges you have made throughout a specific time period. The total amount that you owe to a credit card debt will change from one month to another. Installment debts are more stable since there is an established amount set so you will not have a problem on how you will budget your expenses for a specific month.

Debts may also be categorized depending on its source. The rates offered by the banks or another provider will be lower than that offered by a retailer. It is wiser to know the specific differences that each one offers before you apply for a credit card.