Interest rates are a major factor when it comes to borrowing money or investing your savings. But how exactly do they work?
In simple terms, interest is the amount you pay on top of a loan or investment’s principal. It’s usually calculated as a percentage of the principal, and it’s applied over a set period of time. The higher the rate, the more you’ll pay. However, some lenders and credit card companies offer lower rates for certain types of accounts.
There are many factors that influence interest rates, including the supply and demand for money, inflation rates and monetary policy set by the Federal Reserve. Higher interest rates make borrowing more expensive and can slow economic activity. On the other hand, lower interest rates may make saving money more attractive and could boost your wealth.
Another factor that influences interest rates is the type of debt or investment. Mortgage and car loans typically come with lower interest rates than personal loans or credit cards because they are secured by collateral. This means that if you fail to repay the loan, the lender can seize your property or assets to reduce their losses.
Understanding how fixed and variable interest rates work can help you make savvy financial decisions that fit your lifestyle and goals. Here, we cover the pros and cons of both so you can choose the option that’s right for you.