What It Means
An interest rate is the cost of borrowing money, expressed as a percentage of the principal loan amount per year. Interest rates vary significantly based on the type of credit, your creditworthiness, market conditions, and the Federal Reserve's benchmark rate. Credit card interest rates average around 22-24% APR, while mortgage rates may be 6-8%, and auto loan rates 5-10%. Your credit score is one of the biggest determinants of the interest rate you receive - the difference between a fair and excellent credit score can mean tens of thousands of dollars in interest over the life of a mortgage. Interest can be simple (calculated on principal only) or compound (calculated on principal plus accumulated interest).
Frequently Asked Questions
What determines your interest rate?
Your credit score is the primary factor, along with income, debt levels, loan type, loan term, down payment, and current market conditions influenced by the Federal Reserve.
Can you negotiate a lower interest rate?
Yes. You can call your credit card issuer and request a lower rate, especially if you have a history of on-time payments. For loans, shopping multiple lenders and using competing offers as leverage can result in better rates.