Interest rates are one of the most important concepts to understand when securing loans, managing credit and saving. Whether it’s for mortgages, car loans or credit cards, knowing the different types of interest rates and their impact can help you make savvy financial decisions that fit your goals.
In simple terms, an interest rate is a percentage of the amount borrowed or deposited that lenders charge borrowers for the privilege of using their funds. It’s also the amount that banks earn from investments like savings and certificates of deposit. Lenders levy interest to ensure that they’re making enough money from the use of their funds while also providing an incentive and discipline for borrowers to pay back their debt over time.
Different lenders have their own criteria for deciding what interest rate to offer borrowers. Personal factors like credit scores and history, as well as loan-to-value ratios and length of the loan can all influence what kind of rate you get. Other broader economic trends, such as the Federal Reserve’s benchmark interest rate, can also play a role.
Depending on your personal and financial circumstances, you may want to choose between a fixed or variable rate. A variable rate can change over the course of your loan, while a fixed rate stays the same for the duration of the agreement. If you’re comfortable taking some risk and keeping an eye on market trends, a variable rate could save you more money in the long run.