All You've Ever Wondered About Interest Rates

Have you ever had a basic question about interest rates that you were too afraid to ask? The Ovesture team has your back. Check out these answers to the 5 most common questions about interest rates. And don't worry; we won't tell anyone you asked ;).

1. What are interest rates, really?

In general, an interest rate is the amount that a lender charges on top of the principal. The borrower pays this to the lender in exchange for funding. Interest rates also apply to amounts that are earned by account holders in exchange for holding money in a deposit account at a bank or credit union.?

2. What are the different types of interest rates?

When a person takes out a mortgage or other type of loan, they will pay one of two kinds of interest: simple or compound. Simple interest is just like it sounds: simple. It is interest applied to the principal loan amount and charged to the borrower. Compound interest is usually higher overall, as it consists of a principal interest amount plus accumulated interest that builds upon itself over the duration of the loan.?

3. What determines the interest rates?

In the United States, the Federal Reserve board sets the federal funds rate. This is the rate used by banks to borrow from and lend to one another. Then banks and credit unions use this information to determine the rates they charge their borrowers.?

4. How do interest rates affect the public?

The changing interest rates within financial institutions creates a wave of effects across the entire economy, affecting things like the rates banks charge individuals and companies for loans, the cost of consumer goods, returns on investments, and inflation overall. In general, banks tend to raise their rates when the economy is strong, in order to gain more income, and lower their rates when the economy is sluggish, in order to encourage more reliable returns.??

5. What is APR vs. APY?

When banks issue consumer loans, the interest rates are usually quoted under an annual percentage rate (or APR). The APR is the rate of return (not including compound interest) that lenders get from borrowers in exchange for the use of their assets. In comparison, the annual percentage yield (or APY) is an interest rate earned from keeping your money in a bank for it to use, such as through a savings account or CD. Unlike APR, this interest does include compound interest.?

By understanding interest rates, you'll be able to better understand the mechanics of your loans, investments, and debt. You'll also be able to make more educated decisions to improve your financial health.?

When more questions arise, turn to people you trust to give you expert advice. The Ovesture team is always here for you!