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Understanding Interest Rates

An interest rate can be defined as the exact percentage of the complete debt that is charged to the account in interest. In its most basic form, interest is money that is above and beyond the principal of money that is borrowed.

If you borrow money from anyone who is deemed to be a lender of money, then you have incurred a debt and it is necessary to repay the debt. Interest can be charged on your account for the use of the money.

What interest is can be explained like this, interest is a percentage of the total owing on the debt and this is periodically added to the total outstanding balance as a type of fee for the privilege of using the money. Interest is not a one time application but it continues to add up until the point at which the debtor pays the debt in full.

Interest rates are charged on loans, credit cards, mortgages, utility bills, medical bills and so on. How much interest is charged on each individual item does tend to vary and the credit history of each consumer also plays an important role.

Before you even consider taking out a loan, whether it be a personal loan, a home loan, a car loan, a business loan, or applying for a credit card, it is important to understand how interest and interest rates work.

Interest charges add to the debt burden of all consumers and it is wise to question the rates that you are being charged on anything you charge or borrow.

If you do not take the time to learn about interest then you will not have a clear idea of what your debts are actually costing you and you might find yourself worrying about why your balance decreases at an extremely slow rate despite the fact that you pay your bills on time when they are due.

Interest rates, current or market, are determined by the relationship between the supply of money and the demands of borrowers. Usually when the supply of money increases faster than what is being borrowed, the interest rates tend to fall and they rise when borrowing outpaces the available supply of money.

Consumers are generally protected from being charged excessive interest rates that are over and beyond what the market is dictating, but changes in the economy may drive interests rates higher than would be considered normal by everyday standards.


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