Money Interest Rates

By: EconomyWatch Content   Date: 4 November 2009

About The Author

EconomyWatch Content

Follow The Money

EconomyWatch, Content Team

 

  • Dot Div
  •      

Money Interest Rates, according to economic experts and financial analysts, is the income earned by the lending of a sum of money. Interest is the price of living in a world that relies heavily on credit cards and debt. More specifically, a borrower pays interest for the ability to spend now, rather than wait until he has saved a certain amount of money. On the other hand, the interest a lender receives is his “compensation” for taking a risk for lending a sum of money to the borrower. This is done to override any chance of risk in the event of a borrower not being able to pay the money back to the lender.

Money Interest Rates: Types

Standard variable rate: The payments go up or down at the lender’s discretion. The lender may reduce or delay reducing the variable rate. The upside for this type of interest is that the borrower is generally in control of the pay back clause. The borrower can pay back the extra amount without incurring a penalty. The downside of this type of interest is that it moves with the interest rate. So, if the lender decides to increase the rate, the borrower’s monthly payments will increase. The standard variable deal may be expensive, as compared to other market deals.

Tracker rate: Tracker rate is a variable rate loan with an interest rate that is equal to or a set amount above or below the base rate. It tracks, i.e., moves up or down, with that rate. The base rate can be set by the Bank of England in the UK and by the Federal Reserve in the US. The advantage of this deal is that if a borrower can afford to pay more when the interest rates go up, s/he gets a good return in exchange for the rates when it goes down. The downside is that if the lender’s budget is fixed, s/he cannot stretch to higher monthly payments.

Discounted Interest rate: In this case, the borrower's monthly payments can go up or down, but s/he gets a discount on the lender's standard variable rate for a set period of time. The upside of this deal is that a borrower gets leverage on the rate at a time when cash flow is below normal. The disadvantage is that the borrower only gets a discount for a limited period of time. Moreover, overpayments are not always possible, as is the case with advance payments without penalties.

Fixed interest rate: In this case, the payments are set a certain level for an agreed period. The upside for this deal is that a borrower’s payments will always stay the same even if the interest rates go up. Budgeting is easier and a sense of financial security exists for the borrower. The downside of this deal is that if the rates go down, the payments will be constant throughout the tenure. Also, overpayment and paying off the loan in advance without penalties is not possible.


  • Dot Div
  •      

Most Popular in Interest Rates

Related Links
blog comments powered by Disqus