If there is one thing in the world of finance that is both simple and confusing to understand at the same time, then it has got to be interest rates. The reason for this is described in greater detail below, but simply put interest rates are a percentage that is applied to a specific amount of money, for a variety of reasons. These reasons can be as simple as what a bank pays their clients to store their money with them, or what a lender charges a borrower in order to obtain a loan.
- What are interest rates? The simple explanation of interest rates has already been explained, the more detailed explanation is a tad more confusing. This is in large part due to the difference in what most people consider to be interest rates, and what financial institutions and even governments consider interest rates. When most people talk about interest rates, they typically think about things like the interest rate at the local bank, which is considered a nominal interest rate. A nominal interest rate is a type of interest rate that doesn't consider things like inflation. When financial institutions and governments talk about interest rates, they talk about real interest rates. These are the types of interest rates that include things like inflation, and how the market often changes.
- Different types. As you have already learned, there are at least two different types of interest rates that can affect most people. However, there are literally hundreds of different types out there. For example, think about all the different ways that people can borrow money. Each of these loans includes an interest rate that can (and will) be applied to the principle of the loan. For example, the interest rate on a home loan is not going to be the same as one on a car loan, or even one that is offered by a credit card company. Furthermore, each of these interest rates are different from what you earn on your savings account, or CD, and so on.
- Is there a limit on them? While there is theoretically no limit on how low an interest rate could go, in the real world there really is a practical limit to both how lot and how high an interest rate can go. Lenders need to make money off of what they loan out, or they will soon run out of money themselves. Furthermore, the government takes a really dim view to interest rates that go too high, since they can easily be considered predatory and harmful to the general economy.
Author Bio
Lee Wyatt
Contributor of numerous Tips.Net articles, Lee Wyatt is quickly becoming a regular "Jack of all trades." He is currently an independent contractor specializing in writing and editing. Contact him today for all of your writing and editing needs! Click here to contact. Learn more about Lee...
Sealing Asphalt
Asphalt, much like concrete, will crack and become damaged over time. When this happens you will need to repair it. Part ...
Discover More
Easter Flowers
In large part, Easter flowers are pretty much a matter of local tradition. That being said, there are four different ...
Discover More
Baking Italian Meatballs
Meatballs are so easy to make, it really is a wonder that more people don't make their own. Here is a great tasting ...
Discover More
Unsecured Personal Loans
Personal loans sound great because you often think of some extra money, however they do carry a high degree of risk with ...
Discover More
Using a Home Equity Line of Credit to Pay for Christmas
It has become increasingly popular to use the equity in a home as a "magic bullet" for solving any and all financial ...
Discover More
School Loan Consolidation
Student loans can be expensive to repay. Depending on the types of loans you have, a consolidated program could help make ...
Discover More
Comments