INTEREST RATES.

What is an Interest Rate?

- An interest rate is the percentage of a loan or deposit amount that a lender charges a borrower for the use of assets. Interest rates are typically expressed as an annual percentage of the principal (the amount of money borrowed or invested).

Types of Interest Rates.

• Fixed Interest Rate.

-Remains constant throughout the life of the loan or investment.

• Variable Interest Rate.

-Also known as adjustable or floating interest rates. The rates change overtime based on fluctuations in an underlying benchmark.

• Prime Rate.

-Interest rates charged by banks to their creditworthy customers for loans.

• Annual Percentage Rate. (APR)

-APR is a percentage that reflects the total yearly cost of borrowing or the yearly return on an investment. It takes into account not just the interest rate, but also any fees associated with the transaction.

• Nominal Rates.

-Nominal interest is the interest rate that is stated on a loan or investment agreement, without taking inflation or other factors into account.

• Simple Interest Rate.

-The simple interest rate is a method of calculating the interest charged on a loan or earned on an investment based on the original principal amount, the interest rate, and the time period involved. The formula for calculating simple interest is:

Simple?Interest=P×r×t

where:

P is the principal amount (the initial sum of money).

r is the annual interest rate (expressed as a decimal).

t is the time period for which the money is borrowed or invested (in years).

• Compound Interest Rate.

-The compound interest rate is a method of calculating interest where the interest earned or charged on a principal amount is reinvested, so that in the following periods, interest is earned on both the original principal and the accumulated interest. This means that the interest compounds over time, leading to exponential growth.

How Interest Rates Impact The Overall Cost Of Borrowing.

-When you borrow money, you agree to repay the original amount plus interest because interest occurs over time. The longer it takes to repay the loan, the more interest you will pay.

-Higher interest rates result in higher monthly payments while lower interest rates result in lower monthly payment.

-Most loans are structured with a fixed repayment schedule i.e. [monthly installments] where each payment covers both principal and interest, thus larger portion of each payment goes towards the interest, with a smaller portion going towards reducing the principal. As the principal [the loan] balance decreases, less interest accrues and more of each payment goes towards reducing the principal.

Factors That Influence Interest Rates.

• Inflation.

-Rate at which prices of goods and services increase over time.

-The higher the inflation, the higher the interest rates to compensate for the diminishing purchase power of money.

• Economic Conditions.

-GDP growth, unemployment rates and consumer confidence can impact interest rates. In the period of economic expansion, demand for credit may increase, leading to higher interest rates.

• Monetary.

-It involves the management of a country's money supply and interest rates by its central bank to achieve economic objectives.

• Credit worthiness.

-A borrower's credit worthiness is assessed by factors such s credit score, income, employment history and debt to income ratio. Thes factors can influence the interest rates they are offered.

• Supply and demand for credit.

-If lenders have excess funds to lend, they may lower interest rates to attract borrowers.

-Higher demand for credit increases interest rates.

• Loan Term.

- The length pf the loan term can affect interest rates. Longer loan-terms have higher interest rates than short-term loans.