Types Of Interest Rates in Canada You Should Know About

If you don't know the difference and the types of interest that are out there, and maybe you're paying one form of interest and you don't understand how that's impacting your bottom line, well, you need to understand the difference between. And this is just about educating you because we want to make sure you understand what kind of interest you're paying or what type of interest you're earning. It's not so much the interest rate that you should focus on. Follow your money, know the volume. And if you know the volume, just helps you make good decisions when it comes to.

What and how you're spending your money. And how could you change an outcome for you and your family over time.

If you don't know the difference and the types of interest that are out there, and maybe you're paying one form of interest and you don't understand how that's impacting your bottom line? Well, you need to understand the difference between amortization, simple interest, compound interest. So we're going to tell you that today, and this is just about educating you because we want to make sure you understand what kind of interest you're paying or what type of interest you're earning. And today we're going to give you a really little bit of insight into interest volume versus interest rate and just help you to understand that. Hi, my name's Dan and I'm here with my colleague Jing Jin. And that's what we're going to speak to you about today. With that, we're just going to start a little slide presentation. For the first example, what we're going to talk about is a 25 year amortization. Really a mortgage. This is how a mortgage loan would be look. And we've structured it based on a 3.49% interest rate and using that over 25 years, that's what your monthly payment would be. 1900 $94.97. So that what we've considered during this is that that interest rate stays the same all the way through those 25 years. Now, as you can see from this table, what's that look like in the first month? Out of that $1994, 840 of it has gone to the principal. That's the amount that's going to go against the principal that you owe. And $1,155 is interest. So that's the interest you paid. So the next month your principal went down and therefore you are going to be paying a lower volume of interest. And that's the way this will work. All the way through. As you drop the principal, your interest will start to decline. And you can see in the third year, so that's the 36 month, you know, it's dropped down to 1,065 for interest that you're paying in that month. And your principal has gone up, we get out to five years and are almost even. In fact, now your principal payment is slightly higher than the volume of interest that you're paying. And that's the way an amortization loan will work. As you keep paying it down, you pay the principal down, the interest gets applied, but that interest rate continues to drop over time. Now, when you look at a typical table like this, one of the things I always like to point out to people is, yeah, look at how much interest you paid over those 25 years. I think most people understand this, but if you don't, this is a good way to see it. Over those 25 years, you paid a whole hundred ninety eight plus thousand dollars in interest, which means your total amount that out of pocket was close to $600,000. And people also wonder, well, how does that relate to 3.49%? Because we know, doing the math, it's more like 49% in this example. So I explained it earlier on, as you make payments throughout the life of this loan, you drop the principal. And as the principal goes down, the same interest rate. This table is used to be applied to the principle that's left owing. And so that is why over time, the interest volume is much greater than what you think about it being as you just look at the 3.49%. So we always encourage people, you know, it's not so much the interest rate that you should focus on. Follow your money, know the volume. And if you know the volume just helps you make good decisions when it comes to.

What and how you're spending your money. And how could you change an outcome for you and your family over time. So with that, we're going to go look at one other form of interest that you see all the time.

When you look at simple interest, it is quite simple. You just use your percentage simple interest percentage multiplied by your loan principal. For example, if you have a principal loan amount for $40,000, let's say, and your simple interest rate is just 4%, that means that within the whole year your principal times your percentage rate would be 40 times 4%. And that will be around $1600. But if you divided that by into every single day, so every day your interest amount is just $4.38 very simple. And you look at the volume as well, even though the number may be higher, but the interest amount per day is quite small and quite simple to calculate.

You know, for example, if someone had a heloc, which is a home equity line of credit, and they had borrowed this volume of principal, and they looked at what their interest rate was on that heloc, and they wanted to calculate, well, what is my interest going to cost me every day? This is exactly how you do it. And so you just take your principal, just like Jing Jen said. You calculate it by the interest rate and then figure out what that would cost you in a year, and then just divide it by the number of days in a year, and bang, you'll have a really good idea what that interest charge for you would be over that day or over the year. And that's as simple as it is. And it just works very simply. And that's why they call it simple interest. You should know the difference between simple interest and compound interest. Oh, that's a good one. You know, I always tell people when it comes to compound interest that, you know, and I think this is a quote I heard somewhere. The people that understand it earn it. People that don't understand it, pay it. So what is compound interest? Well, basically, compound interest is all about paying interest on interest. So after a certain period, the interest that you owe gets added to the principal. And when that happens, then you start paying interest on interest. So this little table that we're showing you here for just a plain example is that if you had a principal amount of $40,000 in the first year and you had a 4% interest rate, and you didn't pay that interest back. So at the end of the year, it compounded. You're adding $1,600 to the principal after it compounds. And so in the second year, you're now paying 4% on a higher number, and in this case, it's.

$41,600. And you can see how that makes a difference. At the end of the year, your interest cost went up. And if you keep on using compounding and keep on paying compounding interest, you start paying a bigger and bigger amount of interest based on the original amount that you paid. So that's why I always coach people, you know, if you are in a case where you can pay the interest so it doesn't compound, that's in your best interest. So if you have a loan and it's structured in a way like this, always try to pay the interest before it compounds whatever that compound effect is because some loans will compound every six months, some will compound every year. Just know the difference. Always focused on not paying compound interest. Now all things being equal, if you're earning interest, this is a better way to earn it and where it just keeps on compounding. Uninterrupted compound interest, one of the most powerful things in the world. You need to know the difference between the types of interest that you're paying. If you have different loans out there, always understand what type of loan it is, how much interest am I going to pay, what's the volume of that interest and how can I change that over time. So that's one of the things that we help people with all the time. And what I'm going to encourage you to do is just go to our YouTube channel. There's all kinds of content about how you can use compound interest to your advantage and how you can utilize the process that we teach, which is called becoming your own banker. And that's based on this book by R. Nelson Nash. And I just encourage you, if you haven't read that book, get a copy of it and start to gain the advantage of compound interest.

When we are looking at interest rate, don't just focus on the number, don't just focus on the percentage. Find out like Dan mentioned, find out what kind of interest rate that is. When we are paying for loans, we know that simple interest is the best interest to be paid off. But on the other hand, when we're earning interest rate, if you're just earning a simple interest rate, then you might ask yourself where can you put your money into a better place where your money can compound grow rather than you're just in interest growth towards your, your, your investment, towards your savings. So that's also something that you should consider and not just be fooled just by the numbers.

Take a look at the rest of our, you know, our whole channel and the information we have. It's just going to encourage you to educate yourself, educate your thing yourself on all things financial. That's what we try to do.