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Interest Rates Explained
22 Sep 2019

Interest Rates Finally Explained

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You’ve probably heard about the Federal Reserve lowering interest rates and several people being surprised by that.

What’s surprising is the number of people that don’t understand is how that will impact them. More surprising still, as many as 62 percents of American don’t understand banking.

But know just a little bit about how money, banking, and loans work can help you achieve your financial goal. To restate more cynically, it will at least help you avoid costly pitfalls.

So let’s learn a little bit more about interest rates, what they are, how they impact your wallet and how they work.


The Cost of Money

The funny thing about money is that it — the thing we use to buy stuff — has a cost. The oversimplification for why this is has to do with the Federal Reserve, the federally-backed central bank for the U.S., ensures that private banks have enough cash reserves to function.

Banks lend to one another money that is given to them by the fed for a fee. The cost of that money is passed on to the consumer, either individuals or corporations.

For customers, banks lend out money on the condition that people pay back more than was loaned out. This is often not a set number. Often the amount is based on the time it takes for a person to pay off the loan.

This is the “rate” part of an interest rate.

But Why?

When you get a cash loan, you are effectively getting money today that you could accumulate over the course of time. Another way to think about this is that loans let you pay for things today on the condition you pay for it over the next several months.

Banks charge interest to make money giving money out. That interest helps the bank accumulate more cash or credit to lend out to others. Also, the interest helps pay for administrative costs and creates a profit for the bank.

How Do Interest Rates Work?

There are a few ways that a fixed or variable interest rate is calculated.

The simplest way is to multiply the principal of the installment loan, or the amount of money given to the customer, by an annual percentage rate or interest rate and multiply that by the number of years for the loan’s term length.

Here’s how the looks as an equation: Principal x interest rate x term length = interest. Restated with numbers: $10,000 x 8% x 5 years =  $4,000.

So the total cost of the loan is $14,000.

Some loan arrangements use compounding interest, meaning that interest is applied to the principal of the loan plus the amount of interest that’s charged at the end of a certain amount of time.

Many credit cards “compound” on a daily basis. Here’s how this looks in a formula: Balance x daily interest rate x number of days in billing cycle = interest. It’s not a bad idea to consider rate calculators if you want to get this right.

The More You Know

Now that we’ve run through how interest rates work, it’s time to start shopping for no credit check loans. But there is more yet to do. Getting a bad credit loan requires a little forethought for success. And we’re here to help you through the whole process.

Consider a personal loan of as little as $100 or as much as $15,000 as a way to pay for the stuff you need and build your credit. Here are some other articles you might find helpful:

What Should You Buy With the Best Online Payday Loans?
How to Safely Get No Credit Check Loans
3 Effective Tips for Paying Off Credit Card Debt Faster
How To Get Unsecured Credit Cards Fast