Whether you *think* you completely understand what interest rates are and how they work, or you know that you definitely don’t know everything about them, this will lay out all the essential details.
While “interest” can feel like a dirty word for anyone with debt, there’s a lot more going on with these rates than the way they puff up the balance on your credit card. Since interest rates will invariably appear in nearly every aspect of your financial life, it’s incredibly important to understand the different types of interest and their implications on your financial plans. An interest rate has bearing on the size of your credit card bill, how long it takes you to pay off your mortgage or student loans — and it’s also what fuels your savings..
You probably already know a few things about interest rates, like that the principal balance of a loan is the amount you borrowed, and the interest is the money you pay on top of that every month as a fee for borrowing said money. What’s harder to determine is where interest rates come from (no, they don’t just appear out of thin air), how they work, and how they impact your money. Let’s dig into everything you need to know to speak interest rates fluently.
The different types of interest rates
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