Interest Rate
Candlefocus EditorInterest rate is typically expressed as a percentage of the principle balance of a loan. For example, if a loan has a 4% interest rate, it means that the lender will charge an additional 4% of the principle amount to the borrower in the form of interest over the full term of the loan.
Interest rates vary depending on a variety of factors including the terms of the loan and the risk of the borrower. Generally, those who have good credit and a history of paying off debts on time will have access to the lowest rates, while those with poorer credit may pay higher rates.
The lower the interest rate, the more money the borrower saves as he pays back the loan. This means that a borrower with a higher interest rate has to repay more money to the lender than someone who has a lower rate.
In addition to borrowing costs, interest rate applies to the amount earned at a bank or credit union from a deposit account, such as a savings account or CD. The interest rate that is earned by investing money at a bank is known as the Annual Percentage Yield, or APY. Savings accounts and CDs use compounded interest, which means that they earn interest on not only the principal but also on the accumulated interest of previous periods.
To sum up, interest rate is the fee that a lender charges a borrower in exchange for the loan and it is usually expressed as a percentage of the principle balance of the loan. The APY, on the other hand, is the interest rate earned by depositing money into a savings account or CD and is used to calculate the amount of interest earned from the investment. Interest rates vary based on the amount of risk involved, and lower interest rates can enable debtors to repay the loan faster and save more money.