Interest Rates: Different Types and What They Mean to Borrowers

Interest rates are charges applied by lenders to borrowers based on a percentage of the principal loaned, expressed as an annual percentage rate on loans. The same concept applies to savings accounts or CDs, where banks pay account holders a percentage of their deposited funds. Low-risk borrowers typically have lower interest rates, while high-risk borrowers face higher rates. Interest can be simple or compound, affecting the total amount repaid. Compound interest, applied to both the principal and accumulated interest, can lead to greater payments over time. Savings accounts also benefit from compounded interest. The Federal Reserve sets interest rates as a monetary policy tool impacting borrowing costs. Discrimination in lending is a concern, including higher interest rates for Black homeowners. Interest rates reflect the risk of default and opportunity cost. Economic factors like inflation influence interest rates, impacting borrowing and spending behaviors. Bonds illustrate how interest rates affect investments. Overall, interest rates serve as a cost of debt to borrowers and a reward for lenders, encouraging or discouraging borrowing and spending.