Interest rates play an important role in our financial lives, affecting how much it costs to borrow money and the growth potential of savings. They can impact everything from mortgages and credit cards to savings accounts and investment accounts. Understanding how they work is crucial to ensuring you make sound financial decisions and can help you reach your financial goals.
Interest is the cost that lenders charge for the privilege of lending money to borrowers. It’s calculated as a percentage of the amount borrowed, and it’s usually added to the principal of the loan or credit card account each month. Interest rates can be fixed or variable and can be based on many factors, including economic trends and your own personal situation.
A key difference between a nominal interest rate and a real interest rate is that the former ignores inflation and bank fees, while the latter does so. This allows for a more accurate assessment of the actual return or cost of a loan, especially over time.
It’s also important to understand the differences between fixed and variable interest rates, as they may impact your finances in different ways. For example, a variable interest rate may increase or decrease based on factors like the economy and your own personal circumstances, while a fixed interest rate will not. While it’s possible to change from a variable rate to a fixed one, this typically requires a fee and the lender will notify you of the change.