The amount of money charged by a lender to a borrower for using the lender’s assets, expressed as a percentage. It is determined on an annual basis.
The lender allows for a wide range of assets to be borrowed, including large assets such as vehicles and real property, consumer goods and cash. In other words, interest rate is a lease charge on the borrower for the use of the lender’s asset. In the case of a vehicle or a building, it is not uncommon for it to be referred to as the lease rate.
A slight adjustment in the prevailing interest rate can result in a huge sum of money being repaid to the lender. The borrower should conduct market research in order to establish the lowest interest rate so that you can easily refinance when need arises, especially when interest rates have dropped further.
Interest rates are determined by several factors. These include the borrower’s credit and payment history, financial conditions and the terms of the loan as provided by the lender. It is highly influenced by the New York Federal Reserve Bank and its monetary reserves. Another crucial determinant of interest rates is the Federal Funds Rate, the rate at which banks charge each other for needed overnight cash loans. The Federal Funds Rate is actually the rate at which banks borrow from the Federal Reserve and others edge their profits higher, then lending out money to consumers in the form of several loans.
The higher the borrower’s credit score, the lower the interest charged because the risk of default is low. Other factors that brokers and lenders consider carefully include the length of the loan and the terms accepted by the lending institution.