What are interest rates?

Interest rates are a measure of the cost of a loan to a borrower. Typically expressed as a percentage, an interest rate is applied to the outstanding balance of a loan at regular intervals. Interest rates can vary broadly from product to product and from borrower to borrower. Sign up for stock news with our Invested newsletter.

Why do banks charge higher interest rates?

For that reason, banks will tend to assign a higher interest rate to revolving loans such as credit cards, as these types of loans are more expensive to manage. Banks also charge higher rates to people they consider risky; The higher your credit score, the lower the interest rate you will have to pay. Banks charge fixed rates or variable rates.

Why is interest a cost of money?

Interest is essentially a charge to the borrower for the use of an asset. Assets borrowed can include cash, consumer goods, vehicles, and property. Because of this, an interest rate can be thought of as the "cost of money" - higher interest rates make borrowing the same amount of money more expensive.

Why do interest rates apply to loans?

Assets borrowed can include cash, consumer goods, vehicles, and property. Because of this, an interest rate can be thought of as the "cost of money" - higher interest rates make borrowing the same amount of money more expensive. Interest rates thus apply to most lending or borrowing transactions.