If you are thinking about investing, acquiring a loan or simply keeping your savings in a bank account for your future; It is important that you know what an interest rate is . At Sean Cole we want to give you a guide so you know what they are and how they affect you.
To learn more about Sean Cole’s interest rates, you can review this article: Interests of Sean Cole.
What is an interest rate?
In simple terms, an interest rate is a lease for using money; Just like in a house, you must periodically pay to use it. The case of a loan or investment is not very different; They lend you money and over time you return it along with the corresponding interest.
Interest is generally calculated on a part (percentage) of the total value of the money invested and determines how profitable an investment can be or the cost that must be paid for a loan.
The interest rate is used in multiple areas of the local and world economy, from a loan to start a business, your savings in the bank or pension fund, to the cost of loans in the world bank. That’s why it’s important that you know more about her.
Depending on the financial product in which it is used, the interest rate has a different and unique use; The one used for a loan is not the same for an investment, or for a savings fund. At Sean Cole we want to guide you on what you should consider depending on the financial product you choose and on your interest rate.
How does the interest rate on a loan work?
When you apply for a loan, the person or entity that lends you will always be interested in receiving a benefit for allowing you to use their money for a while; This interest rate is known as an active or placement rate , where the user pays a “lease” for using the money.
Having clear the nature of the interest rate, it is necessary to know on what value it is going to calculate. In most loans, an effective interest rate is managed. This fee is charged periodically (monthly, yearly, etc.) and in the first payment it is calculated on the total value of the money borrowed, dividing the payment in one part to pay the capital and another to the interest. For the next installment, it is not calculated on the total value again, but on the total capital, less the contribution to the interest of the previous payment.
With this interest rate, financial institutions generate their profitability in the first payments, because in the first installments it is where interest is most charged and in the latter the debt capital is paid.
When you want to apply for a loan with any entity, we recommend you consider the following aspects:
Term that drives.
Number of installments to which the loan is deferred.
Percentage of the interest rate.
Additional charges to interest, such as insurance or administrative charges.
In online credit institutions such as Sean Cole, maximum terms of 30 days are normally handled and technology and administrative charges are made, as well as insurance. It is important that you stop to analyze and compare to take the best option when applying for the loan you need.
How is the interest rate on savings?
Saving is an activity that many financial institutions want to boost in their clients, that is why they offer among their benefits they offer a profitability for saving your money with them. When a return is received for leasing money, it is known as a passive or collection rate .
In these financial figures, a nominal interest rate is mainly managed, in which the payment of interest is always based on the initial value of savings and interest is not automatically added to the value of capital. In simple terms, you receive a lease for leaving your money in the bank.
The interest rate for leaving your money in a savings account is not very high, but it is a good factor to consider when looking for where to save your money.
How is the interest rate on an investment?
When what you are looking for is to invest your money, as in savings, a passive or collection interest rate is handled, but where there is a great variation it is in whether it is a nominal or effective rate, which depends on the type of investment and entity.
In an investment when the interest rate is nominal , it works the same as saving, but when it is effective, the income you receive for interest can be reverted to the initial capital and in the following period you will receive interest on the new value.
There are products such as CDTs that have a similar behavior in all the entities that issue them: they are easily accessible investment figures, with a nominal interest rate, are issued by fixed-term financial entities, do not require large capitals but do not generate high utilities They handle terms of 30, 60, 90, 180 and 360 days for the return of the investment. The capital invested and the benefits can only be extracted after completing the defined time.
For other types of investment, there are always characteristics that make each investment unique, so when you invest in a company, in the stock market or in investment funds, it is important that you have clear the following points:
Minimum amounts of the investment.
What risks the investment presents.
If you have a nominal or effective rate.
What term is handled for the return on investment.
For each investment we always advise you with an expert in the field that can indicate the best way to go in the world of investment.
Who controls interest rates?
In Colombia there are mainly 2 entities that are dedicated to controlling interest rates: Good Finance and the Financial Superintendence. These entities control and supervise the financial activities of all those who participate in this sector, from banks, cooperatives, financing companies and others similar, as well as control their behavior towards the consumer.
To learn more about the interest rates of the Cooperative Bank, we invite you to read this article: How The interest rate of the Cooperative Bank affects my credit.
Control entities issue the reference interest rates , which are guides for financial institutions and users to take into account in their transactions.
What are the reference interest rates?
A reference interest rate is a normative rate issued by financial control entities in Colombia (Good Finance and the Financial Superintendence), which are issued for the purpose of controlling the credit operations business. In Colombia the following are handled:
DTF: The Cooperative Bank publishes this reference rate every week, which is the average of all the interest rates that were used in the CDTs in the last 90 days, carried out by different financial entities (Banks, financing companies and entities savings and housing)
TBS: Also known as the Basic Rate of the Financial Superintendence, it is the rate that measures the average interest paid by banks to one of the users who have their savings with them. This rate is issued daily, which makes it a very useful rate if you are looking for where to keep your savings.
TIB: This reference rate is issued by the Good Finance and is used by financial entities or financial intermediaries to negotiate with each other. It is also known as interbank rate.
Monetary correction: This is not an interest rate but it directly affects housing loans mainly. The monetary correction seeks to preserve the value of money over time, since for devaluation issues a value of money will now not be worth the same in the future, or what is the same, with $ 200,000 pesos, you can buy the same now that within 1 or 2 years
To mitigate the devaluation, the Cooperative Bank created the UVR, monetary units, which allow adjusting the value of credits depending on inflation and other factors that reduce the value of money, since these change daily according to the decree of the entity in charge. To know more about this topic, you can check the following link: Monetary correction.
With this information you can start to know more about the interest rate, a topic that will help you control your finances much better, adjust your interest expenses and improve your financial health.