“Per annum” is a Latin term that means annually or each year.
When it comes to contracts, per annum refers to recurring obligations or those that occur each year throughout an agreement. For example, if a bank charges an interest Simple Interest Simple interest formula, definition and example. Simple interest is a calculation of interest that doesn't take into account the effect of compounding. In many cases, interest compounds with each designated period of a loan, but in the case of simple interest, it does not. The calculation of simple interest is equal to the principal amount multiplied by the interest rate, multiplied by the number of periods. of 3% on a loan per annum, it means that you will need to pay an additional 3% of the principal amount every year until the end of the contract.
Uses of Per Annum
Here are other examples of how the term is used:
- A monthly subscription to a magazine costs $10, so the subscription’s total cost per annum is $120.
- The total amount of a home loan is $1 million and is payable in 10 years. Divide $1 million by 10 to get the amount you need to pay each year. In this case, it’s $100,000.
- The maintenance cost Capital Expenditure A Capital Expenditure (Capex for short) is the payment with either cash or credit to purchase goods or services that are capitalized on the balance sheet. Put another way, it is an expenditure that is capitalized (i.e., not expensed directly on the income statement) and is considered an "investment". Analysts view Capex per annum of a vehicle is $3,000. As the vehicle owner, you need to pay that amount throughout one year.
- The monthly interest rate Interest Rate An interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal. of the credit card is 1.5%. Multiply it by 12 months to get the interest rate per annum. In this case, it’s 18%.
- When you lease office space for $10,000 for five years, you are expected to pay $10,000 annually, regardless of changes in the property’s value.
- The per annum interest rate refers to the interest rate over a period of one year with the assumption that the interest is compounded every year. For instance, a 5% per annum interest rate on a loan worth $10,000 would cost $500.
- A per annum interest rate can be applied only to a principal loan amount. The practice makes it more convenient to compare different interest rates from various sources when looking for a loan.
- When it comes to savings and investments, the compound interest Compound Interest Compound interest refers to interest payments that are made on the sum of the original principal and the previously paid interest. An easier way to think of compound interest is that is it "interest on interest," where the amount of the interest payment is based on changes in each period, rather than being fixed at the original principal amount. on $10,000 for three years at 6% per annum is $1,910.16. Below is a sample calculation to get the toal interest amount:
- 10,000 x .06 = 600 (first year)
- 10,000 + 600 = 10,600
- 10,600 x .06 = 636 (second year)
- 10,600 + 636 = 11,236
- 11,236 x .06 = 674.16 (third year)
- 11,236 + 674.16 = 11,910.16
- 11,910.16 – 10000 = $1,910.16
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