Personal Finance Ology

An interest rate is the measure of how much it will cost you to borrow money or the rate that determines how much your investment will grow. When you borrow money the interest rate, or the amount of money it will cost you to borrow that money, is determined by how long you choose to borrow the money, the amount of collateral and how much of a risk you are. The lender will use these and a few other factors in determining the interest rate for your loan.

No matter what there is always an interest rate attached to borrowing money. It is the way the lender makes a profit. There may be times when you see advertisements for “zero percent interest “ it is a definite that a profitable interest has been added into the price of the product you are purchasing for the advantage of the merchant.

How Rates Are Set
There are many factors that affect the interest rate on a loan. Different lenders may weigh heavily on certain factors while others may not hold that same factor with high importance. Some of these factors may include:

Risk- the higher the risk the higher the interest rate. Credit cards debt is considered an unsecured debt therefore the interest rates are higher due to the high default rate. It is because of the risk factor that credit card companies have to make up for those losses with their interest rates.

Cost- lenders must factor in the price they will have to pay to get the money they are going to lend you. The way lenders are able to loan money is through borrowing the money they are going to loan. Therefore, the interest rate they give to you depends on the interest rate on their borrowed money.

Collateral-the more collateral the loan is secured with the lower rates. The more stable the collateral is the more assured the lender is that they are going to be able to recover their money.

Marketing- some lenders use interest rates to attract more customers. They use no money down or no finance charges advertising to get the attention of more borrowers.

Interest rates are very tricky and should be approached with caution. It is always possible to calculate interest rates and compare which lending approach is good for you. When borrowing you should always take into account the advertisings that promise zero interest lending because there could be a possibility that it could be no interest or no interest payments. If it is a no interest payment loan this means that interest will be accumulating over time. You will still have to pay it-just not immediately. When deciding on the loan that will make more sense always read the fine print and take the necessary time to choose accordingly.

Related posts:

1. APR vs. APY
2. Clean Up Your Credit Score (Part 1)
3. The Basics of Interest (Part Three)
4. The Basics of Interest (Part Two)
5. How Much Home Can You Afford To Buy?