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Compound interest or how to get profitability from your profitability

14 December 2020
Compound interest or how to get profitability from your profitability

When managing our savings we must take into account different details:

The most important of all is to do something with them. There are several options: spend, save or reinvest. If money is saved in cash or in an unpaid checking account, it would be losing value over time due to inflation. Therefore, the first thing we must do is look for a return for said savings according to our level of risk, looking at possible commissions or expenses. But there is another important detail: interest. There are two types of interest: simple and compound. They are calculated in different ways and it is very important when making a decision. On a personal level, if we ask for a loan, it will probably be convenient for us to calculate the interest with the simple method, but if we are going to invest our savings, the compound will suit us. Why? Let's understand it with an example:

Compound interest or how to get profitability from your profitability

The difference between simple and compound interest is that simple interest is calculated on the initial capital, while compound interest is calculated on capital plus accumulated earnings.

This implies, ceteris paribus (keeping the initial capital and the interest rate constant), that the profits will be much higher with compound interest than with simple interest.

In the example above, the interest rate and initial principal are the same, but the benefits are higher with compound interest: € 2,400 <€ 2,597.12. Applying one or another method of interest calculation represents a difference of € 197.12.

Compound interest implies an exponential growth in profit: the more years the investment lasts or the greater the amount, the greater the difference, while with simple interest the growth is linear: the same thing is obtained in all periods of the investment.

Let's see the formula in depth to understand it:

Ci = Initial capital = € 10,000

Cf = Final capital (different in each case)

i = Annual interest rate = 8% = 0.08

n = Time period = 3 years

Compound interest or how to get profitability from your profitability

In the event that the compounding period is not annual, the “n” should be replaced by “n/k”, depending on whether it is semi-annual (k = 2), quarterly (k = 3), quarterly (k = 4) or monthly (k = 12).

Now that we know how to differentiate between both types of interest, if we have to choose between both with the same amount, the logical thing is that we prefer simple interest when contracting a loan, but compound when investing our savings.

But what kind of interest do investors charge in Inversa?

At the time the transferor's payment is received, Inversa enters the interest in the accounts of the investors who have invested in the said invoice or promissory note.

Therefore, interest is paid to the investor in advance, at the time the transfer is formalized. This implies that almost at the same moment in which an investment is made, investors receive the interest in advance in order to be able to reinvest it from that moment. This gives you compound interest and therefore a higher profit.

Why do the bills have different interest rates?

The discount rate, intended entirely for investors and in advance, is established in the risk study of the operation. As can be seen, it depends on the credit opinion and the rating.

What interest does the platform charge?

Inversa does NOT charge investors absolutely anything: no commissions, no management or opening costs, interest ... Investors ONLY RECEIVE interest in relation to the invoice they have helped to finance, they NEVER PAY.

Inversa only charges commissions to the transferor companies, as well as other charges, but for investors, it is a totally free service.

For more information, you can consult the section "Contracts and Rates".

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Berta Otero Serantes
Berta Otero Serantes

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