Everything You Need To Know About Interest Rates

What Is An Interest Rate And How Does It Affect Your Loan? 

How well do you understand interest rates? Learn the basics about interest rates, how they work, and how they affect your loans in this article. 

Credit cards, student loans, mortgages, car loans, personal loans, and even allotment loans have interest rates. Do you know what interest rates are and can you tell if you’re getting a good interest rate? Read on to learn more about interest rates. 

What Is Interest Rate?

An interest rate is the amount lenders charge for your use of their money. It is expressed as a percentage of the principal or the total amount you borrowed. The interest rate, thus, affects how much you pay in total. The higher the interest rate, the higher you pay for your loan.

One way to calculate your loan’s interest rate, multiply the principal by the interest rate and term of the loan, this may not be the total amount you pay because you also have to consider the APR.

Interest Rate VS APR

People often confuse interest rates and annual percentage rates (APR). While the interest is the amount lenders charge you for using their assets, the APR is the total costs for borrowing said money. This includes interest rates, finance charges, document fees, processing fees, and other such fees. Like interest rates, the APR is also expressed in percentages.

How Interest Rates Work?

Interest rates rise or dip depending on the economy. The Federal Reserve Bank, who sets the federal funds rate, has the power to raise or lower interest rates based on the needs of the economy. Lower interest rates are generally indicative of recessions since it encourages spending, therefore stimulating the economy.

Ultimately, it is the bank or the financial institution that decides the interest rate applied to your loan. Interest rates differ based on the type of loan you apply for, the amount of loan you need, and your credit score. Generally speaking, if a loan is considered high risk (such as if you have a bad credit score), financial institutions assign a higher interest rate, and vice versa.

Are You Getting A Good Interest Rate?

As you may already know, there is no one-size-fits-all in loans. Each loan is unique; so gauging whether you are being offered a high or low interest rate involves calculating how much you will be paying in total—that includes both the interest rates as well as the APR. You also should consider if the rates are fixed or variable. 

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