Interest rates are central to many of our financial decisions, and understanding how they work can reap dividends in your finances now and into the future. But sometimes, the number of different rates that may apply to you when you borrow or save can be confusing.
Interest rate is the amount paid or earned over a period of time for the use of someone else’s money, expressed as a percentage. It is the cost of borrowing and the profit of investing, but can also be found in other financial transactions such as rental income, insurance premiums and property valuations.
Generally, interest is calculated over the term of the loan or investment, which is typically a year. However, the actual interest rate that you pay or earn will depend on a number of factors, including your creditworthiness and market trends.
For example, a lender will consider your credit score and report when deciding whether to lend you money. They may also take into account other factors such as your debt repayment history and your ability to pay back the loan. In addition, banks and lenders may also monitor economic trends, such as inflation, which can affect the interest rates they charge.
Another factor that can influence the interest rate applied to your loan or investment is whether it’s fixed or variable. A fixed rate will stay the same throughout the term of the loan, which can make budgeting easier. Alternatively, a variable rate will increase or decrease over the course of the loan term.
