Interest RateCredit Repair Definition
The percentage charged by a lender for borrowing money, or paid by a bank for depositing money.
Definition
An interest rate is the percentage of a principal amount (loan amount or deposit) that a lender charges a borrower for the use of assets, or that a bank pays a depositor for funds held. For loans, it represents the cost of borrowing money, typically expressed as an Annual Percentage Rate (APR), which includes the interest rate plus certain fees. For savings accounts or investments, it represents the return earned on the deposited funds. Interest rates are influenced by factors like inflation, central bank policies (e.g., the Federal Reserve's federal funds rate), the borrower's creditworthiness, loan term, and loan type.
Frequently Asked Questions
What's the difference between interest rate and APR?
The interest rate is the direct cost of borrowing money, expressed as a percentage of the principal. The Annual Percentage Rate (APR) is a broader measure of the cost of credit, as it includes the interest rate plus other loan fees and costs (like origination fees or mortgage insurance). APR provides a more complete picture of the total cost of borrowing.
How does my credit score affect interest rates?
Your credit score is a major factor in determining the interest rate you'll be offered for loans and credit cards. Generally, a higher credit score indicates lower risk to the lender, resulting in lower interest rates. A lower credit score often leads to higher interest rates to compensate the lender for increased risk.
What is the difference between fixed and variable interest rates?
A fixed interest rate remains the same throughout the loan term, providing predictable payments. A variable interest rate can fluctuate over time based on changes in an underlying benchmark index (like the prime rate), meaning your payments could increase or decrease.
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