Interest rates play a big role in our lives, from the amount we pay for loans to how much money we can earn in savings accounts. However, it can be difficult to understand how they work. This article aims to make sense of how they affect the true price of goods and services. We’ll also explore what influences them and how they change over time.
What Is an Interest Rate?
An interest rate is the percentage of the total amount owed that is charged by lenders to borrowers when they borrow money. It’s the primary way that lenders make a profit on lending. It’s important to understand how an interest rate works because it makes debt more expensive or less affordable.
There are many factors that influence an interest rate, including creditworthiness and the state of the economy. Banks and other lenders look at a person’s FICO credit score, bank statements and other financial documents to determine their creditworthiness. A higher creditworthiness typically results in a lower interest rate. High interest rates often encourage consumers and businesses to spend more, which can increase demand and fuel the economy. However, this can also lead to inflation. When inflation occurs, the Federal Reserve will raise interest rates to slow the economy down and combat the rise in prices.
Whether you choose a fixed or variable rate will depend on your expectations for future economic conditions. A fixed interest rate will give you the peace of mind of knowing what your payment will be from start to finish, making budgeting easier. A variable interest rate will allow you to benefit from any future rate decreases.
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