Interest rates are one of the most fundamental aspects of your financial landscape, influencing everything from borrowing costs to savings growth. Understanding what they mean and how they work will help you make better decisions about the use of credit or your choice of loans, such as mortgages and autos.
Interest is the amount paid or earned for using another person’s money (borrowing) or invested in an asset, typically expressed as a percentage of the principal sum. It can be compounded or simple and can be calculated over a variety of time periods, such as a year. Whether you are borrowing or saving, interest will impact your budget in many ways, from the buying power of every dollar in your wallet to how much money you need to save to reach your goals.
In the case of lending or borrowing, interest is generally reflected as an annual percentage rate (APR) or annual percentage yield (APY), making it easy for borrowers to see what their payments will be. However, there are also other factors that could factor into your decision to choose a fixed or variable rate, including: