Interest Rates vs. Dividends – What Are They?

Simply put, interest is the cost to you when you borrow money from a financial institution. Interest is earned by the institution to help offset the cost of the loan and also profit from allowing you to borrow that money.

Paying Interest – Borrowing

Interest is calculated based on factors such as your credit score and the amount you are looking to borrow, and is typically an “annual percentage rate” (APR)-based loan.  

An example of a personal loan payment process:

  • You’re looking to take out a $7,000 personal loan to pay medical bills.

  • Your credit union will look at your current debt to income ratio, credit score, payment history and more to help determine whether or not the loan is approved and what rate you qualify for.

  • You are approved for a $7,000 loan at a 7.0% APR (Annual Percentage Rate)

  • Your loan will be paid over the course of 5 years

  • This means your payment per month will amount to approximately $139

  • You will pay roughly $1,315 in interest to your lender

  • Your total loan will amount to about $8,315 with interest

Earning interest - Dividends

Conversely, interest can be earned by you on certain accounts such as share certificates, savings or checking accounts, depending on where you do your banking.  As a member and shareholder of a Credit Union, interest earned on accounts is referred to as dividends.

Dividends are the sum of money paid to you on a regular basis (monthly or quarterly). When it comes to earning money, you should look for a financial institution with a HIGH dividend rate, which will give you the most earnings on money kept on deposit.   Most share certificates earn a higher dividend than a regular savings account because the money is deposited into a term account, meaning you cannot withdraw it until it matures. The financial institution rewards you for allowing it to use your money to lend out to others by paying you a higher dividend rate.

Typically, you will earn money every month or quarter based on your balance. Most credit unions will give you a higher rate when you have a higher average daily account balance. Eventually you’ll start gaining “compound interest,” which is adding the interest paid to you to the amount you already have on deposit, maximizing your earnings.

Whether you’re looking for a low-interest rate loan or a higher dividend on your savings, we at Niagara Regional FCU can help. Check out our loan rates and our saving dividends HERE.  Be sure to call or visit us for all your financial needs!

Brittany Grimmer