How Does Interest Rate Work (And How It Affect Our Lives )

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One of the most confusing aspects regarding borrowing money is calculating the interest rates. Interest rates vary and when you go to apply for a loan or a mortgage it may appear to be scary when the loan officer begins discussing real interest rates, nominal rates, and effective interest rate loan fees.

There are various kinds of interest rates depending upon whether you are borrowing money or investing money.

Types of Interest rates

• Fixed Interest Rate: A fixed-rate remains the same unless the lender changes it.
• Variable Interest Rate: An interest rate on a loan or security that fluctuates over time.
• Annual Percentage Rate: This shows you, as a percentage, the annual cost of a secured loan or mortgage.
• Prime Interest Rate: This is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit.
• Discounted Interest Rate: This is the interest rate charged to commercial banks and other financial institutions for short-term loans they take from the Federal Reserve Bank.
• Simple Interest Rate: This is interest calculated on the principal portion of a loan or the original contribution to a savings account.