Interest rates shape the financial landscape, and understanding them can help you better manage your debts and savings. In this article, we explain what interest is, how it’s calculated and how different types of loans have different rates. We also discuss how inflation impacts interest rates, and why higher rates can make it more expensive to borrow and invest money.
Interest is the amount you pay to a lender for the use of their funds, money or property, and it’s usually calculated as a percentage of what you borrowed. Interest rates are the primary way that lenders earn income. In fact, if you borrow money for an extended period of time, it’s very likely that you will end up paying back more than the original sum that you borrowed. This is because lenders must compensate for the lost opportunity to invest their money or use that property during the duration of the loan or debt.
There are many factors that influence interest rates, including the amount of risk associated with the investment and the length of the term. For example, a mortgage may have lower rates than a credit card, and some lenders offer fixed interest rates that stay the same for the entire term of the loan. Other factors include whether a loan is secured by an asset (e.g., real estate) and the purpose of the loan. Inflation expectations are also often a major driver of longer-term interest rates, and can impact the cost of borrowing for households and businesses.
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