What Is the Difference between Rate of Return and Interest Rate?

This is the common question asked by investors in order to assess projected returns. The rate of return measures how much money you received from an investment, whereas the interest rate indicates how much your funds increased over time.

What Is a Rate of Return (RoR)?

The gain or loss on an investment over a specific time period is known as the rate of return (RoR), and it is expressed as a percentage of the initial investment. 1 The rate of return is the percentage change from the beginning to the end of a period.

What Is the Difference between Rate of Return and Interest Rate

What Is an Interest Rate?

The interest rate is the cost imposed by a lender on a borrower and is stated as a percentage of the loan’s principal. In most circumstances, the interest rate on a loan is stated as an annual percentage rate (APR).

Another example of an interest rate is the rate of return on a deposit account or CD at a bank or credit union (CD). The interest earned on these bank accounts is shown as an annual percentage return (APY).

What Is the Difference between Rate of Return and Interest Rate

What Is the Difference between Rate of Return and Interest Rate?

The difference between the two phrases arises from the fact that interest on a loan is paid while investment returns are gained. The rate of return on an investment is the rate at which its value grows in relation to the initial investment.

This rate, which is calculated as a percentage of both the initial investment and the annual profit, is the most popular way to express the cost of borrowing money. Interest, on the other hand, is computed from money paid in addition to the loan’s principle amount.

Knowing the difference between a rate of return and an interest rate may help you better understand the disparity. The rate of return is the proportion of money invested to money earned or lost.

An annual rate of return is computed, for example, by dividing the initial investment by the amount recovered at the end of the specified time period.

What Is the Difference between Rate of Return and Interest Rate

The rate of return may be calculated by subtracting the original investment from the total return and then dividing the result by the starting investment. If you pay $100 and earn $120 back, your return on investment (ROI) is 20% since your initial expenditure is deducted from your ROI.

When this value is divided by the initial investment, the resultant percentage is the annual rate of return on investment. The interest rate is the percentage by which the amount of interest accumulated on a loan is indicated. It has nothing to do with the profitability of an investment.

The interest rate on a loan is the percentage that the borrower must pay the lender each year in addition to the principal sum of the loan.

The entire interest expenditure during the life of a loan is divided by the original loan balance to obtain the annual percentage rate (APR). When repaying a $100 USD loan, for example, a borrower would divide the additional $25 USD paid over the course of a year by the overall amount owing (100).

What Is the Difference between Rate of Return and Interest Rate

This amounts to a 25 percent annual percentage yield (APR). The rate of return on an investment, like the rate of interest on a loan, is expressed as a percentage of the principal borrowed.

Conclusion

“Rate of return” and “interest rate” are terms that are often used interchangeably. But they are not the same. Interest rate is the annual percentage interest paid on borrowed money. A rate of return is the amount you make on your investments after taking into account any investment expenses.

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