FAQ About Interest

Interest is used in two senses in economics. In the first sense, interest is the rate of income earned as a result of the sale of a debt agreement. In the second sense, it is the income ratio of the capital used as input for production.

The difference between the total amount to be repaid to the lender and the loan received gives us the interest charged. The interest received is applied over the principal amount. There are two types of interest. One is the simple interest rate and the other is the compound interest rate.

The nominal interest rate is calculated by adding the real interest rate to the inflation rate. If the deposit interest rate is 20% and the inflation rate is 15%, the real interest rate is essentially determined as 5%. The most important factor forming the real interest rate is the risk premium.

Inflation refers to a decrease in purchasing power due to the continuous increase in the prices of goods and services. What is important here is not the increase in the price of a particular good or service, but the continuous increase in the price of the product basket, which consists of goods and services in general.

The Central Bank of each country determines its decision on interest rates by checking the suitability of inflation for the next period and the pre-targeted inflation rate. In addition, it is considered responsible for explaining all these reasons to the public due to the necessity of transparency and accountability criteria.

These elements can be listed as follows:

• Production gap,
• Currencies,
• Waits,
• Prices of oil or other minerals in international markets,
• Prices determined by the public.

For this reason, these are the factors that are taken as a basis in the interest rates determined by the Central Bank.

The loan pricing applied by banks varies. Moreover, it would be a wrong choice to make comparisons only according to the interest rate.

Because banks are obliged to publish all the features of the loans they have provided both on their websites and on the newspaper pages they give. It is necessary to compare the monthly or annual customer cost interest rates in the bottom section of this published interest rates graph. So everyone can choose the most accurate interest rate.

In the case of demand inflation, there is an inverse relationship between interest and inflation. If the interest rate decreases, inflation increases, that is, if inflation increases, it is necessary to increase the interest rate in order to reduce it.

Since lowering the policy rate when inflation is high will create higher inflation, long-term market rates do not fall, on the contrary, they increase. This situation reduces investment appetite, expenditures and production. This is the reason why interest rate cuts do not create the desired economic recovery.

When central banks increase the interest rate, investors withdraw from other investment instruments to deposit money and start demanding country currencies. Because it becomes more attractive to deposit money in their own country's currency.

Interest rate hikes are made when there is a deficit in the balance of payments, so that there will be an inflow of hot money from the outside, thereby relieving the domestic market. In this way, the country's currency also appreciates. When the country's currency appreciates, cost inflation and demand inflation are prevented due to the increase in the exchange rate. In short, inflation falls.

If interest rates fall, banks find the opportunity to borrow more cheaply. It borrows more cheaply and provides more loans to more people. Making loans also increases the profits of banks. If the interest rate declines, the stocks in the banking sector are likely to appreciate.

Compound interest is the calculation of the interest rate by adding the value of the first interest to your principal when you will receive interest again after the interest you receive on your principal.

You get interest on the interest from previous years.

For example, let's say you deposit 100 units of money in a bank with an interest rate of 5%. The next year your principal will be 105 units of money. Since your principal is 105 units when interest is added again the next year, 5% of 105 will be added to your principal, and so on.

Technically, money is constantly added to your money at an interest rate. However, considering the inflation rates, your money may be in place. Because interest is the cash that gives you back the lost value of your money in the face of inflation. In other words, the purchasing power of your money can be thought of as standing still thanks to interest.

In countries with low inflation, the money in interest may provide a certain profit return.

Increasing interest rates, on the one hand, lowers imported input prices by utilizing the domestic currency, on the other hand, slows down demand. When demand weakens, there is downward pressure on pricing behavior. In this way, inflation goes down.

Money can be deposited or withdrawn to the time deposit account at any time. However, withdrawal/deposit transactions, except for deposit accounts with daily interest, may cause the maturity to deteriorate in general, and this may result in no interest income or a loss.

High interest rates provide lenders with higher returns in an economy than in other countries. Therefore, high interest rates attract foreign capital and cause the exchange rate to rise.

If the money is withdrawn from the time deposit account at the end of the specified maturity, the principal and interest at the determined rate can also be withdrawn.

In the time deposit account, the principal deposited into the account; It provides returns equal to the interest rate determined in certain periods such as 1 month, 3 months, 6 months or 1 year. The longer the set period, the higher the interest rate, and therefore the higher the yield; The more money deposited into the account, the higher the interest income.

A checking account is an indefinite and non-yielding account. In the time deposit account, there is a profit based on the number of days determined. While there is the advantage of making transactions, depositing and withdrawing money at any time in the checking account; In the time deposit account, the principal should not be touched during the maturity period.

Checking accounts are safe deposit accounts. These accounts do not charge interest and are not a savings account. Transactions such as providing cash, depositing money, withdrawing money, telephone banking, money order or EFT can be done easily through demand accounts.

Simple interest

The formula for simple interest yield is as follows.

Simple Interest = Principal x Interest Rate x Duration

For example, when we deposit 1000 currency unit of money in the bank with 10% (0.1%) interest for 3 years.

We have 1000 x 0.1 x 3= 300 currency unit total return.

Compound interest

Total money earned at the end of the period =

Principal.(1+monthly interest)^number of periods

For example, when we deposit 1000 currency unit of money in the bank with 10% (0.1%) interest for 3 years.

1000 x (1+0.1) over 3= 1331 wire, ie 1331-1000=331 currency unit interest earnings.

A high interest rate strengthens the currency and adds value to the currency. The appetite for saving increases. Debt repayments rise. It is possible to earn more interest income. Investing becomes harder.

A low interest rate depreciates the currency. The appetite to spend increases. Debt repayments go down. Income from interest decreases. Ideal for investing.

Zero-interest loans, also called interest-free loans, are the type of loan in which only your principal is paid back, with the amount of loan you use being repaid at certain intervals for specified periods and no additions are made to the loan amount you use.

The decrease in interest rates and the increase in investment cause the wheels of the economy to turn more healthily. When the interest rate falls, consumption increases and saving decreases. The number of individuals turning the wheel of the economy and the amount of money circulating in the market increase.

Interest rate cuts cause the local currency to depreciate. In countries whose production structure is based on imported intermediate goods, this situation increases the price of imported intermediate goods, thereby increasing production costs and triggering inflation.

In an environment where interest rates are low, the propensity to spend increases as the income to be obtained from savings is also low. Therefore, lowering interest rates is expected to increase consumption expenditures and support economic growth.

The word interest come from Latin: inter = between and esse = to be. The verb was substantiated in Middle Latin and borrowed into German in the 15th century, where it initially had a different range of meanings (loss of benefit, damage caused by neglect; interest, advantage).