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What is Interest Rate?

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Sindhuja Poorni
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interest rate

Interest rate

Interest rate can be defined as the rate at which a client has to pay back interests for the sum of money he had borrowed from the creditors. The Rate of Interest (ROI) may vary from one creditor to another. Interest rates are always a percentage of the principal amount that is borrowed. The creditor may change the rate of interest over a long term interest. Starting from home loans to education loans and all types of deposits, interest rates may be fixed or a floating value.

Choosing a fixed interest rate

As the ROI does not fluctuate it offers a certainty of knowing the exact payment to be done as interest over a fixed tenure. Fixed rates are often lower than floating interest rates, making it widely acceptable by all debtors and creditors. An early repayment charge is applicable in case of repayment of the total debt before the end of the tenure of fixed interest rate.

Floating value of interest – A promising value of ROI

The ROI may vary with wide market changes. It also gives flexibility over opting for fixed ROI at any time without incurring any penalty. In case if ROI goes down over a time period the debtor has the facility to payoff the loan at a faster rate over lower ROI.

The only drawback is it may affect the debtor’s budget at times when the interest rate goes higher than the fixed term rates.

Do you Know?

It is possible to split the borrowed amount between two loans, one with a fixed rate and the other with a floating ROI.

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1 COMMENT

  1. Sometimes the banks get too excessive about their interest rate, especially when it comes to loans. But in credit cards is not that bad, i can use all the money and payback in small amounts. At least here in Venezuela the interest rate is not high enough to overpass your debt with the bank.

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