Interest rates play central roles in many financial decisions, from buying a home or car to managing credit and saving for retirement. But understanding how they work can be confusing. For example, what’s the difference between a fixed and variable rate, and how do they factor into the true cost of a loan? The answers are important to making sound financial choices.
Essentially, interest is the price of using someone else’s money. For borrowers, it’s reflected as an annual percentage of the principal amount of the loan. For savers, it’s often measured as an annual percentage yield (APY), which takes into account the effect of compounding.
The type of loan, its duration and whether it’s secured by assets all impact the rate. So, too, do factors like the economy, which influence whether interest rates are high or low. For instance, higher interest rates may be used to combat inflation while lower rates encourage borrowing and spending.
Whether you’re shopping for loans, savings or investment products, it’s good to know the different types of interest rates available. This infographic is a great place to start. Then, use the information to help you make informed financial decisions that fit your needs and goals. And remember, whether you’re a borrower or a saver, the right choice could save you thousands (or even tens of thousands) over the life of your debt or investment. Good luck!