Interest rate is a key factor in both borrowing and saving. It can make a big difference in how much it costs to buy something with credit or a mortgage, and in how long it takes to reach a savings goal. Interest rates can seem complicated, but it’s worth knowing how they work and what impact they have on your finances.
Interest is the amount that a lender charges for the use of money or property. It’s usually calculated as a percentage of the principal sum and can be fixed or variable. Interest rates affect both personal and business borrowing, investments and savings. Typically, higher interest rates mean more expensive borrowing and lower rates mean cheaper debt.
Banks set their own interest rates based on a variety of factors, including the state of the economy. A country’s central bank (e.g., the Federal Reserve in the US) also sets benchmark interest rates that each financial institution uses to determine its own APR range. High interest rates discourage borrowing and slow economic growth, while low rates encourage spending and help economies grow.
There are many different types of interest rates, depending on the type of investment or loan. For example, a home loan or car loan may have a fixed interest rate that does not change during the life of the loan. Credit card and savings accounts, on the other hand, may have variable rates that change with market conditions. Personal factors also influence interest rates, such as your creditworthiness and collateral. Lenders may look at your credit score and other financial documents to get a full picture of how you manage debt before deciding on an interest rate.
About the Author
