What Is Per Annum Interest and How Is It Calculated?

Defining Per Annum Interest

“Per annum” is a Latin phrase that translates to “for each year” or “annually.” When applied to interest, it indicates that the stated interest rate is an annual rate. This provides a standardized measure for financial comparisons. For example, an 8% per annum interest rate signifies that 8% of the principal amount will be accrued as interest over one full year.

This annual rate serves as a fundamental benchmark in finance, allowing individuals to understand the yearly cost of borrowing or the yearly return on an investment. Even if interest is calculated or paid more frequently, such as monthly or quarterly, the per annum rate represents the equivalent annual cost or earning. It is a standard method for expressing rates, returns, and costs, enabling consistent comparison of financial instruments regardless of their actual payment frequency or compounding periods.

Calculating Per Annum Interest

Calculating per annum interest is straightforward for simple interest, which is calculated solely on the original principal amount of a loan or investment. The formula for simple interest is Principal (P) multiplied by the Rate (R) and the Time (T), expressed as I = P x R x T. Here, the rate (R) must be the annual interest rate expressed as a decimal, and the time (T) is the duration in years.

For instance, consider borrowing $5,000 at a 6% per annum simple interest rate for two years. To calculate the interest, convert the rate to a decimal (0.06). Then, multiply the principal ($5,000) by the rate (0.06) and the time (2 years): $5,000 x 0.06 x 2 = $600. The total interest accrued over the two-year period would be $600. The total repayment amount would then be the principal plus the interest, totaling $5,600.

Common Applications of Per Annum Interest

Per annum interest rates are prevalent across various financial products. For savings accounts and certificates of deposit (CDs), the per annum rate indicates the percentage of interest your deposited money will earn annually. This rate determines how much your savings grow over a year.

In the context of loans, such as mortgages, car loans, and personal loans, the per annum interest rate represents the annual cost of borrowing. For a mortgage, a 5% per annum rate means you are charged 5% of the outstanding principal balance each year. Similarly, for car or personal loans, this rate dictates the annual interest portion of your payments, influencing the total amount you repay over the loan term. Understanding this annual rate allows individuals to compare different loan offers effectively and assess the true cost of credit.