Interest rates play a critical role in the lives of consumers and businesses. They determine how much debt costs, how fast a savings account grows and many other financial matters. They are discussed in the news, on TV and in the op-ed pages, as they rise, fall and remain steady. People think about them when they shop for mortgages, car loans and credit cards. Businesses consider them when they are planning capital expenditures. Investors pay attention to them because they affect investment returns and stocks’ price movements. And economists analyze them in the context of other economic factors such as inflation and monetary policy.
A key concept is the difference between nominal and real interest rates. The former ignores inflation, and the latter does so to give a more accurate picture of how much a principal is worth. Also, there are fixed and floating interest rates, and the latter are typically based on a reference rate such as the Federal Reserve Funds Rate or the London Interbank Offered Rate.
The most important factor that influences the interest rates that people pay or receive is their individual credit standing. But other considerations that can influence what a person pays or earns include the type of debt (secured and unsecured), the length of the loan, and economic trends such as inflation. While some of these factors are uncontrollable, individuals can take steps to understand what influences interest rates in order to make informed financial decisions.