What is an interest rate?
An interest rate is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.
Lenders typically offer lower interest rates to borrowers who are low-risk, and higher rates to high-risk borrowers. While lenders typically set their own rates, competition for borrowers means lenders within a certain area usually offer comparable numbers.
Aside from a borrower’s risk assessment, several outside factors may influence current interest rates. These typically include inflation, lower money supply or a high demand for credit.
When interest rates rise, the economy may worsens due to a lack of affordable credit. Interest rates can influence corporate profits and government monetary policies.
Interest rate example
Unless a buyer are paying cash for a home, he or likely will take out a sizable loan for a new residence. When the bank offers the loan to the buyer, it will included a mortgage interest rate.
For example, let’s say the house in question costs $250,000. The future homeowner has a down payment of $10,000 in cash, but he or she will need a loan for the extra $240,000.
The formula for determining how much interest he or she pays is: principal x interest rate x number of periods. In this case, the borrower will pay back a total of $305,469 and make monthly payments of $2,546.
Mortgage lenders typically offer lower interest rates. Credit cards, car loans, personal loans and other types of loans usually have higher interest rates.