Interest rates are a key factor in most financial decisions, whether you’re borrowing or saving. It’s important to understand how they affect your costs and returns, and how they can affect the affordability of home mortgages, car loans and credit card purchases.
An interest rate is the cost of borrowing money or the price that a lender charges for lending money to a borrower, expressed as a percentage. A higher interest rate means that it will cost more to borrow, and a lower interest rate means it will cost less. Interest is calculated on the amount of principal borrowed and is paid either in a lump sum or over a period of time.
Lenders calculate and set their own interest rates, based on factors such as the borrower’s credit history and ability to repay. The lender may also consider economic trends when determining a rate. A higher interest rate means it will cost more to borrow, and if the lender is not making a profit on the loan they will need to charge a higher interest rate to cover their costs.
A fixed interest rate allows borrowers to know what their assessments and repayment schedule will look like over the life of the loan, which makes it easier for them to create a budget. However, a fixed interest rate can mean that if market conditions change, the borrower may face higher interest assessments later in the life of the loan.
