APR, APY, and Interest Terms
These terms show up in loans, savings, and advertising.
Introductory Rate
A low, temporary interest rate offered to attract new customers
Default Rate
A significantly higher interest rate charged when a borrower misses payments
Negative Interest Rate
A scenario where the borrower is paid and the lender pays to store money
Basis Point (BPS)
A unit of measure for interest rates equal to 1/100th of 1%
Interest-Only Loan
A loan where the borrower only pays the interest for a set period, not the principal
Fixed Interest Rate
An interest rate that remains constant for the duration of the loan or investment
Variable Interest Rate
An interest rate that fluctuates over time based on an underlying index
Amortization
The process of paying off a debt over time through regular installments
Prime Rate
The base interest rate commercial banks charge their most creditworthy customers
Usury
The practice of lending money at unreasonably high or illegal interest rates
Simple Interest
Interest calculated only on the principal amount
Principal
The original sum of money borrowed or invested
Nominal Interest Rate
The stated interest rate before accounting for compounding
Effective Interest Rate
The actual interest rate earned or paid due to compounding
Compounding Frequency
How often interest is calculated (e.g., monthly, daily)
compound interest
interest earned or charged on prior interest too
APY
annual percentage yield, commonly used for savings growth
APR
annual percentage rate, commonly used for borrowing cost