Interest Rate is a very common term which is generally used in any financial transactions. Interest is generally paid on any capital borrowed and there are certain rates applicable on the capital borrowed which are called as Interest Rate. Interest rate is calculated by taking in to consideration the principal amount and the amount of interest paid.
Features Of Interest Rates
Interest rates are very much dependant on the market conditions. There may be factors like inflation which affects interest rate and causes disturbances in the economy. When inflation goes high, it tends to cause lot of distortions in the economy. Interest Rate could change on account of inflation or due to some policy changes from World Bank or Federal Reserve. In case of inflation going to higher levels, World Bank or Federal Reserve generally intervenes and monitors the economy closely. They also suggest some short term measures to curb interest rate.
Financial Institutions like Banks or Non-Banking Finance Companies generally give loans to consumers. This could be loans for buying properties, loans for buying cars, loans for buying consumer goods, loans for personal purposes, loans for agriculture purpose or may be loans against property or shares. When they sanction loan, they have certain interest rate fixed for these loans. Accordingly, they fix the repayment schedule also for the borrower. In any loan, interest rate plays an important part. Lower Interest Rate on loans makes it easier for people to borrow as repayment is lower and also saving is more. On the other hand, higher interest rate on loans creates a liability for the borrower and at the same time, creates an asset for the lender. In case of borrower, higher interest rate means higher repayments and that means he would have to pay more. But for lenders or institutions financing, it is beneficial as they get higher returns on their principal amounts.
Types Of Interest Rates
One can compare interest rate on different types of loans. Interest Rate is generally mentioned as percents per year. There are different terms like Annual Percentage Yield or Annual Percentage Rate which are generally used for Interest Rate. There are different types of Interest like Simple Interest and Compound Interest. In case of Commercial Loans, generally compound interest rates are taken. There are 2 types of interest rate, one is fixed interest rate and other one is floating interest rate or variable interest rate. In case of fixed interest rate, the interest rate is fixed through out. In case of loans taken for 20 year period duration, interest rate does not change during the period of the loan. This is known as Fixed Interest Rate. There are loans which are dependant on the market conditions or which are dependant on the LIBOR Rate. This rate is known as floating interest rate or variable interest rate. In case of home loans, the interest rate keeps on changing for floating interest rate.
There are many who own their own homes today. It is not possible for everyone to have
sufficient bank balance and then buy homes. So one has to resort to mortgage or pay a mortgage. Interest Rate on mortgage plays an important part. Any hike in mortgage interest rate can severely impact ones family budget.
It is very important to note that the economy gets affected due to changes in interest rate.