What are the differences between ‘interest rate’ and ‘discount rate

Rate, is the price officially set to certain salable things, these rates can be determined by a public entity or also depending on the variation in the market, or competition in the market. It can be defined as the tribute or price that must be paid for the sole purpose of being able to enjoy the product we are paying for.

The rates are the prices for using a product, a clear example of this is the price of coffee, which is paid in the market to later be able to enjoy it at home.

We should not be confused between the rate and the public price , since rates are the public taxes that must be paid. While public prices are about the benefits that must be paid to a public entity.

In other words, public prices do not have taxes . The rates help to manage personal money, of a company or business .

What is an interest rate?

It is an indicator of economy which indicates how profitable an investment, savings, purchase or the cost of a loan is. The interest rate represents something positive for the person who is going to collect it, likewise, it represents an additional cost for the person who is going to pay it, the interest rate is the price of money .

It is an amount of money that must be paid, and the more time you spend, the more money it is , usually a part of the money corresponds to the person who lends this money, due to the operation that is being carried out.

If we talk about a loan , the interest rate will be applied to the person who must pay, for the use of this money.

If we are talking about a deposit , the interest rate payment will be applied to whoever has it in deposit, be it a company or a person. It can also be done through an online payment .

The interest rate can be fixed or it can increase over time. The interest rate is divided into two types:

  • Nominal: Refers to the profitability of a financial product month by month. In other words, this is the one that calculates the simple interest.
  • Cash: Refers to the income generated and this is responsible for calculating the compound interest.

Why should the interest rate be charged?

The interest rate always has a great influence on the economy of a country, since it will increase the prices of market products. Likewise, the rates help in which the cost of a debt that is increasing.

What is a discount rate?

The discount rate is the cost of a current product and how long it will take to pay , that is, this rate is based on calculating the value of money over time. The discount rate is used mostly in companies due to the financial analysis it offers, since it indicates how much money will be won or lost in the future. It also helps to maintain a business budget

The discount rate is the opposite of the interest rate , since the discount rate generates profitability if it is paid in a certain short term, since if it takes a long time to honor this debt, it would lose profitability.

In other words, the discount rate has a positive value if it is paid in the guarantee time, but if it is not paid in that time, it can generate a doubt because there is no guarantee.

Differences between interest rate and discount rate

  • The interest rate is created by an initial capital , while the discount rate comes from calculating a future capital.
  • The discount rate is based on the value of the currency today, while the interest rate is based on the value over time.
  • The interest rate is generated by a loan , the discount rate is used to calculate the value in the present.
by Abdullah Sam
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