Interest Rate

Financial Dictionary -> Loans -> Interest Rate

An interest rate is a percentage amount of the whole sum of money, which is either being saved or borrowed. In the case of savings, the saver gets paid either an annual or monthly interest rate amount on the money in their accounts. For borrowers they have to pay either a monthly or annual interest rate on their debt repayment.

Interest rates have a major impact on the whole economy and help to control the amount of borrowing and saving taking place. If interest rates are high investors and savers benefit. On the flip side people in need of borrowing money are negatively hit. If interest rates are low then savers do not see any real benefit, but it is financially a good time to borrow money.

When taking out a mortgage (loan to finance the purchase of a house) the borrower will be required to pay an interest rate, which is basically a percentage amount of the borrowed amount paid monthly. This is how lenders make a profit.

There are two types of interest rates applied to mortgages. Firstly is an Adjustable Rate, which fluctuates over the term of the loan, in relation to the economy and various indexes. When interest rates are high borrowers opt for adjustable interest rates in hope that over time the rate will become lower.

The second type is a fixed interest rate, which is agreed before the mortgage is taken out and remains fixed throughout the term unless part of the agreement is broken. This is great for borrowers when interest rates are low because even if they skyrocket in the future they will still be paying the low fixed interest rate.

If a borrower is deemed a risk due to their credit rating and financial history they will usually be required to pay a higher interest rate in order to make the mortgage secure for the lender.