The interest rate is an important part of your financial landscape, impacting everything from the cost of borrowing to the return on savings. But understanding how it works isn’t always easy. From the way a mortgage’s interest rate is calculated to how credit cards’ interest rates are determined, there are many different factors that affect an interest rate. In this article, we’ll take a look at some of the most common ones.
The most common interest rate is the annual percentage rate (APR) that lenders use to calculate the cost of loans or credit. This includes the principal sum, the compounding frequency and the number of years in which interest is paid. However, there are other types of interest rates that can be used for various financial instruments and transactions.
For example, in bond markets, the yield curve—a graph that shows the relationship between different interest rates for loans or bonds and their respective terms to maturity—is often used to measure investors’ risk preferences. The typical shape of this curve is a rising one.
The higher the interest rate, the more expensive it is to borrow money. This is why it’s important to understand how interest rates work and to shop around for the best deal when it comes to a loan or credit card. It’s also worth remembering that, even when the APR of a loan is low, there may be other costs associated with the debt, such as origination fees and application fees.