We often hear about interest rates but have you ever wondered what they are and how they affect your finances?
An interest rate is reward for saving money or the cost of borrowing it. Interest is calculated as a percentage of the total money that you borrow or save. You will see this in many different areas of your finances. If you keep a savings account at your bank, they will pay you a percentage for saving your money. The higher the interest rate, the more you will earn.
You’ll also hear about interest rates when it comes to borrowing money. This includes a mortgage, car loan, or credit cards. Your interest rate when borrowing money is based on your level of risk which is determined by your credit score. The higher your credit score, the more likely you are to pay back the borrowed funds which in turn, means a lower interest rate. For those with a lower credit score, they are considered a higher risk and results in a higher interest rate. Credit scores range from 300 to 850 with anything over 670 is considered good credit.
Lenders make their money off of interest. The example provided by CAPTRUST shows if you took out a one-year home improvement loan of $10,000 at 6% interest, that interest rate would cost you $600 over the course of the next year. The higher the interest rate and the higher the original amount of money borrowed, the more money you will pay in interest.
For more information on interest rates or to view CAPTRUST’s short video, click here.
