The idea of this topic is to spark a question cum discussion among our fellow readers. If you have landed on this blog, you might be thinking; do interest rates have types. If so, how many? What is an interest rate plan? Why is it important?
If that is true for you, the blog has served half its purpose. Now let’s discuss the types of interest rates in detail.
Debt comes from two components, principal and interest.
- Principal refers to the actual amount of money that has been lent.
- Interest is an additional charge attached to the repayment and acts as an added form of income to the lender.
Interest, however, has more than one type. Let us discuss the three main types.
Fixed Interest Rate:
This is the most common type of interest rate. As the name suggests, it is a fixed repayment percentage or amount discussed and approved both by the lender and borrower in the initial stage. This makes it possible to have a transparent obligatory agreement between the two parties.
The loan payment does not change or fluctuate with time or during repayment schedule.
It is to take into account that fixed interest rates can sometimes be higher than variable interest rates (explained later) but gives the borrower a complete picture to manage and plan his repayment accordingly.
Variable Interest Rate:
This is the opposite of fixed interest rates. Variable interest rates are subject to fluctuations and changes according to the market ups and downs.
This is a plain risk because it can work in favor of both the lender and borrower.
If the percentages of the prime rate of the lent money increases or decreases, the interest rates may change annually.
Annual Percentage Rate (APR):
It is the cost and return on money lent over a year. This is majorly used by credit card companies. Credits that are provided by the bank are charged upon interest rates annually along with any other fee or other costs.
Similarly, if you have a savings account, your annual percentage rate is added upon existing money in your account; increasing the total amount.
Choosing the right plan?
Choosing the right interest rate plan is crucial in determining the loan type, payment schedule and what fits into your requirements. As discussed earlier, interest rates are not fixed and may vary. It is highly advisable to form an agreement with clear terms and conditions for future references.
This is a gateway to understand the economics and intricacies behind words we use casually such as debt, loan, and interest rates.
For more comprehensive guidance on matters regarding lending and borrowing money, get in touch with Reddoor Funding on (832) 539-1099.