The interest rate is an important part of the equation when borrowing or saving money. It can affect your decisions ranging from how much you pay on a loan to how much money you can earn from savings accounts and certificates of deposit (CDs).
In simple terms, interest is what a lender charges or receives for the privilege of using a borrower’s money. The amount charged is known as the interest rate and is typically expressed as a percentage of the principal borrowed or lent. It is calculated and paid on a regular basis, such as monthly or annually, over the duration of a loan, which can be either fixed or variable.
There are many factors that influence interest rates, including creditworthiness, the type of loan and market conditions. The latter can be determined by such things as Federal Reserve policy and the strength of the economy. For example, if more people have jobs and are able to pay their bills on time, there is a lower risk of default and, therefore, a lower interest rate.
Whether the interest rate on a loan is fixed or variable, there are advantages and disadvantages to both. For example, a fixed rate makes it easier to budget for the future because the interest rate will remain the same until the loan is paid off. However, if market conditions cause interest rates to rise suddenly, this can make it more difficult to manage your expenses.
About the Author
