Types of Interest Rates and Factors That Affect Them
An interest rate is money paid or charged by financial establishments for holding money at a savings account or borrowing a certain amount of money. Banks charge money because there is always a risk that borrowers default, go bankrupt, or pass away.
There are different types of interest rates, including variable, fixed, compound, and simple. Variable, floating, or adjustable rate is offered on various financial instruments, including credit cards, mortgages, bonds, and loans. The charges paid by customers vary with fluctuations. For example, a customer borrows $75,000 from a financial institution. The loan comes with 6-month LIBOR plus 4 percent. The LIBOR is currently at 2.2 percent. The customer will pay 6.2 percent in charges or $3,100 within a period of 6 months. At the end of the period, the LIBOR goes up to 3 percent, and the borrower pays 7 percent. He owes $3,500 for the next 6 months. The LIBOR is 1.3 percent during the second year, and the borrower owes 2,650 during the first 6 months.
Fixed interest loans come with fixed installments, meaning that borrowers pay the same amount on a monthly basis. This gives them a degree of security because they can budget and save for their monthly payment. Banks offer different financial products with fixed interest, including loans, mortgages, lines of credit, credit cards, HELOCs, and others. There is also a difference between compound and simple interest. The latter refers to a method for calculating the charges on a loan. They are calculated by multiplying the number of periods by the principal amount and by the rate of interest. Compound interest is different in that it also earns interest because it is added to the outstanding balance.
Factors that Affect Charges
There are different factors that influence interest rates, including inflation, taxes, and liquidity. Other factors that play a role include the state of the economy and political gains. Lowering rates before elections can influence the election outcomes. Deferred consumption, international forces, supply and demand, and other factors influence rates. Changes in the state of the economic and financial system play an important role. Two important factors are interventions by the national authorities and monetary policy. Monetary policy is one way to control economic growth and the inflows and outflows of money. Fewer consumers take out loans and mortgages when the charges are high. This limits the cash outflows and affects spending because people choose to save and have less money to spend. Then the government may choose to stimulate economic growth by reducing the rate. Consumers borrow and spend more, and the growth rate increases at a rapid pace. To avoid overheating, the government will increase the rate once again. Finally, the demand and supply of money also play an important role. Supply refers to the quantity of financial products and services available. Governments use different instruments to manipulate supply and demand, including buying significant volumes of securities, market operations, selling securities, and others.
Ways to Ask for Interest Rate Reduction
If you think that your interest rate is excessive, you may be asking yourself what the best way to ask for interest rate reduction is. You may wonder if this is a likely outcome and if you should bother at all. Obviously, some cardholders will find it easier than others. Those who have been...
Fixed Interest Rate for a Predictable Repayment Schedule
A fixed interest rate is fixed over the term of a loan or mortgage, and borrowers make the same monthly payments. Mortgages, consumer loans, and other debt instruments fall in this category. Pros and Cons of Loans with a Fixed RateThe main benefit is that borrowers can predict their monthly...
Benefits for Holders of High-Interest Savings Accounts
A high interest savings account is a type of account that yields good interest rates and is FDIC insured. It comes with a higher minimum account balance and restrictions on the number of withdrawals allowed. The restrictions are intended to minimize costs for the financial institution. They allow...