Interest rates play a key role in our financial lives, impacting everything from how much we pay for homes and cars to how much we earn on our savings. But with the different types of loans, credit cards and deposit accounts out there, it can be challenging to keep up.
The interest rate is the cost you pay to borrow money and is calculated as a percentage of your loan’s principal over the life of the loan. In most cases, the annual interest rate (APR) for loans is used, although some lenders may use the annual percentage yield (APY) which takes compounding into account.
When calculating interest, the principle borrowed is called the “borrowed amount,” and the lender’s earnings over the course of the loan are referred to as the “interest rate.” It is important to understand how each of these factors works together when comparing loans, deposit accounts or investing options.
Many factors influence the market interest rate, including inflation and monetary policy. The combination of these factors determines how affordable loans are and how profitable savings or investments become. Interest rates are vital for individuals managing their personal finances and helping them make informed financial decisions. Understanding how interest rates work can improve your financial literacy and help you be better prepared for when you’re ready to take out a loan or invest in assets. Learn more about the various types of interest rates and how they work to help you make smart financial decisions.