Interest rates are important to many financial transactions, including personal loans and credit cards, mortgages and car loans, business purchases, investments, saving money, and even retirement accounts. The interest rate is the amount of a loan’s cost that is charged to a borrower or earned by a lender over a specified period of time, usually a year.
A high interest rate can make it more expensive to borrow, which may slow consumer and business demand. A low interest rate can encourage borrowing and boost economic activity. Interest rates are influenced by many factors, such as the supply and demand for credit, the inflation rate, government monetary policy, and more.
Borrowers should consider the different types of interest rates available to them, such as fixed or variable, when deciding what type of debt is best for them. For example, a home loan or credit card with a fixed interest rate will offer stability and consistency, making it easier to budget and plan for the future.
Financial institutions set their interest rates, or Annual Percentage Yield (APY) – the amount of interest that is paid to consumers for deposit products such as savings and certificates of deposits, based on a number of things, including federally-set rates, market conditions, and their own funding needs. When Federal Reserve rates decrease, for example, savers can expect to see lower interest rates on their savings products. This is because financial institutions will typically try to balance keeping their deposit-based products competitive with earning enough interest to cover the costs of lending and to help ensure they remain profitable.