Types Of Interest Rates

Whether a loan is for a mortgage, a business, or something else; a financial company will often show off how low their interest rates are as much as possible, but there are instances where they would rather not tell everyone how much interest they’ll offer you if you decide to invest with them.

What you may not know is that not all interest rates are worked out equally and the same. In fact, there are loads of different types of interest rates – and having an understanding of them could really benefit you a great deal if you’re hoping to make the best choice for your financial situation.

Simple interest rates

A simple interest rate is pretty much the most basic type of rate you can find.

If you decided to borrow £100 for a year, with a rate of 10 percent, then you would owe £110 after the year is over. It’s known as a simple interest rate for a reason!

Fixed interest rates

A fixed interest rate will stay the same until the loan is paid. It’s typically used for mortgages or other kinds of long term loans and the rate is often set before the loan is agreed upon.

Variable interest rates

A variable interest rate can vary depending on a base interest rate (which is generally the index value). This type of rate can change weekly or monthly, and it can also rise or drop, so you won’t know how much you’ll pay until it changes.

Prime interest rates

A prime interest rate usually refers to the interest rate that a lender will use with their best or most trusted customers. It can rely on the federal funds’ rate, or the daily rate that the banks use when they either borrow and lend.

Discount interest rates

When the Federal Reserve Bank makes a loan which will last for a short period of time to a financial institution, they’ll often apply a discount interest rate. These are based on the borrower’s cash flow, which will take the time value of their money into consideration, as well as the risks which could happen in the future

Amortized interest rates

An amortized interest rate (which is often more common with car or home loans), is calculated so that the borrower will pay a higher amount of interest, but a smaller amount of principal at the beginning of the loan.

As time goes on, the amount that needs to be paid each time increases, which lessens the principal and also the amount of interest that’s charged on it. So, the amount of interest which is charged on the principal shrinks over time, whilst the interest rate remains the same.