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What is an Interest Rate?

What is an Interest Rate?

The rate charged for borrowing money.

Typically expressed as a % called an APR (Annual Percentage Rate).

This is the yearly cost of borrowing or loaning money.

Determined by The Fed

  • Change all the time
  • Vary depending on type of loan

High interest rate = Strong Economy

Low interest rate = Weak economy

How Do They Work?

When you borrow money, the amount you receive is the principal. And when you pay back the loan, you repay the principal plus interest.

Borrowing money with interest costs more money.

Loaning or investing money with interest earns more money.

High interest rate is good for lenders and bad for borrowers.

Interest rates charged for:

  • Mortgages
  • Credit cards
  • Unpaid bills
  • Student loans
  • Auto loans

How to get a good rate?

  • Minimize debt
  • Pay bills on time
  • Maintain high credit score

Inflation and Interest

Interest rate hike → Lower economic growth → Slower inflation

Interest rate cut → Higher economic growth → Faster inflation

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