The rate of return is the percentage profit or loss generated by an investment, while the interest rate is an indication of the amount of interest that must be paid on a loan. The rate of return is based on investments made, while the interest rate is based on loans.
The difference between the rate of return and the interest rate is based on the nature of the investment returns and the interest paid on a loan. The rate of return refers to a value that indicates how much return is generated based on the initial investment made, also called capital. This rate is expressed as a percentage and is based on principal and annual return, which is the amount earned over the course of a year. An interest rate, on the other hand, is based on additional amounts paid on a loan that are not part of the actual loan payment.
It is often easier for someone to understand the difference between the rate of return and the interest rate by first understanding what each of these terms means. The rate of return on an investment is the percentage profit or loss generated by an investment. This value is based on the initial investment, or principal, and the amount recovered over a certain period, such as one year for an annual rate of return.
The rate of return can be calculated by subtracting the principal from the return and then dividing this value by the principal to determine the rate. For an investment of $100 US dollars (USD), for example, and a return of $120 USD, the principal is first subtracted from the return to determine the growth of $20 USD. This value is then divided by the principal, for a rate of return of 0.20 or 20%, which indicates the rate of return on that investment over one year.
An interest rate is an indication of the amount of interest that must be paid on a loan. It has nothing to do with any realized gain or loss on an investment. When someone applies for a loan, they are usually presented with the APR on that loan, which indicates the payment in addition to the actual principal that needs to be paid.
The interest rate on a loan can be determined by dividing the amount of interest paid on a loan over a year by the value of the initial loan amount, or principal. Someone who takes out a $100 loan, for example, and pays an additional $25 during the year it is paid back, would divide that 25 by 100. This would give an interest rate of 0.25 or 25%. While both the rate of return and the interest rate are expressed as percentages, a rate of return is based on investments made while paying interest on a loan.
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