# How do per annum interest rates work?

Per annum interest rates are a way to express the annual interest rate on a loan or investment. The term "per annum" simply means "per year."

For example, if you have a savings account with an interest rate of 3% per annum, that means you will earn 3% of the balance in the account each year as interest. So, if you have \$1,000 in the account, you would earn \$30 in interest after one year.

Similarly, if you have a loan with an interest rate of 5% per annum, that means you will be charged 5% of the outstanding balance each year as interest. So, if you borrowed \$10,000, you would owe \$500 in interest after one year.

Per annum interest rates are commonly used because they allow for easy comparison of different financial products, regardless of their term or compounding frequency. However, it's important to note that other factors, such as fees and penalties, can also affect the overall cost or benefit of a financial product.

To elaborate further, per annum interest rates are often stated as an annual percentage rate which takes into account the effects of compounding. Compounding refers to the process of adding the interest earned to the principal amount, which then becomes the new basis for calculating future interest.

For example, if you have a savings account with an interest rate of 3% per annum that compounds annually, you would earn \$30 in interest after one year on a balance of \$1,000. However, if the interest compounds monthly, you would earn slightly more interest because the interest earned each month is added to the principal amount, and subsequent interest is calculated based on that new, higher balance. it's important to understand the difference between simple interest and compound interest. With simple interest, the interest is calculated based only on the principal amount, whereas with compound interest, the interest is calculated based on the principal plus any previously earned interest.

Per annum interest rates can be applied to a wide range of financial products, including loans, mortgages, credit cards, savings accounts, and investments. When comparing different financial products, it's important to consider not just the interest rate, but also the terms and conditions, fees, penalties, and other factors that can affect the overall cost or benefit of the product.