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Understanding interest rates can be confusing, but it’s important that you’re aware of the basics before taking out a loan or borrowing money from family and friends. This guide will help clear up any confusion you have about interest and what it means.

Millions of people all across the world are interested in understanding interest rates. This article is going to go over some basics about how interest rates work. We’ll talk about the different types, what they mean for you, and other important information you need to know before making any decisions. Interest rates can be a confusing topic with a lot of jargon that isn’t always explained well but we’re here to help!

What are interest rates?

Interest rates are the percentage of interest that you will pay for borrowing money. They are usually quoted as an annual percentage, which means they’ll be a little higher than if it was given to you monthly or quarterly.

What is APR?

APR stands for Annual Percentage Rate and this number includes fees like transaction charges and application costs.

What does it all mean: the big picture

We all know the interest rate is important for borrowing or saving money. So what do changing interest rates mean in practical terms? Check out the table below for the effects of increasing or decreasing interest rates.

Why do you pay interest?

Interest rates are what the lender charges you for borrowing money. It’s their way of making a profit from your loan and it can also help offset any losses on other investments they might have made at the same time.

Your interest rate is calculated as your loan amount times APR

For example, $100,000 with an APR of 12

How is interest calculated?

Interest rates are determined by either Treasury note yields or the fed funds rate. The Federal Reserve sets the federal funds rate as the benchmark for short-term interest rates. The fed funds rate is what banks charge each other for overnight loans.

There are two main types of interest that can apply to a loan, simple and compound.

Simple interest is a set rate on the principle originally lent to the borrower.

Compound interest means paying an additional amount of both principal and accumulated compound interests on top of what was borrowed.

Types of interest rates

Financial institutions take pride in the low interest they offer. But you need to know how it’s calculated.

Banks can pay you to invest with them. You need to know what type of interest rate is being advertised in order to make the best decision for your circumstances.

Fixed interest rates

Fixed rates are the most common form of interest for consumers, as they are easy to understand and stable.

Variable interest rates

Interest rates can go up and down, too. This is what happens with variable interest rates. One reason borrowers benefit from variable rates is if the prime interest rate declines.

Comparison rate

A comparison rate includes the interest rate as well as certain fees and charges relating to a loan. The aim of the comparison rate is to help you identify the true cost of a loan and compare loans and services offered by financial institutions and mortgage providers.

Comparing interest rate

One of the best ways to compare interest rates is by using an online calculator or speaking with a certified financial services professional.

Principal and interest will pay off the loan

Principal and interest loans

Most people get this type of loan. You make smaller payments for a long time and you will pay off the loan eventually as a result. It’s very common for these loans to be for a period of 30 years. They will often have a fixed rate at the beginning of the loan term but be careful as the rate can jump up after as a result of the honeymoon period concluding.

Interest-only loans

You aren’t paying off the principal you borrowed, so your debt isn’t reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them.

Check out our loan calculator here.

If you would like more information about how Bee Sure Financial can help you contact us today on 0434 113 962.

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