The value of money isn’t as straightforward as most people think. $100 today will not have the same value ten years from now just as $100 five years ago does not have the same value today. This is called the time value of money, and it has something to do with how interest rates work.
For starters, the interest rate denotes the rate at which the principal or original amount increases value over time. For long- term liabilities, banks can go with simple interest in which the principal value and interest rates stay the same for the entire term. When banks apply interest rates to loans, they front load these payments. This means that during the first few payments of any loan, there is more interest being paid than the principal amount. This is in contrast to a payday loan, such as those offered by http://www.instantpaydaycanada.com where there is usually only one payment and the interest is much simpler.
While this sounds more confusing than it should be, compound interest on the other hand is much simpler than it sounds like. The only difference is that the principal being used increases each month. This increase is derived from the interest amount from the previous month. Other than that, it should be easy to calculate monthly payments over time.
While the principal amount and interest rates are important, the term or length of time shouldn’t be ignored. Changing any one of these three can change the whole system, which can affect the true value of money.