Interest Rate

What is an interest rate? 

An interest rate refers to the cost of borrowing money expressed as a percentage. When you borrow money, you typically have to pay back more than you borrowed, and the interest rate determines how much extra you pay. Similarly, when you deposit money in a bank or invest it, the interest rate determines how much you earn on your savings or investments. 

How is a fixed interest rate different from a variable interest rate? 

A fixed interest rate stays the same for the entire duration of a loan, meaning your monthly payments remain consistent. On the other hand, a variable interest rate can change over time based on fluctuations in the market, meaning your monthly payments can go up or down. With a fixed rate, you get stability and predictability, while a variable rate offers the potential for lower payments but comes with the risk of increases in the future.

How are interest rates determined?

Interest rates are determined by a combination of factors, including bank policies, inflation, and creditworthiness of borrowers. Central banks, like the Reserve Bank of Australia (RBA) set benchmark rates that influence borrowing costs across the economy. 

Inflation expectations also play a significant role, as higher inflation often leads to higher interest rates to maintain purchasing power. Additionally, the creditworthiness of borrowers, affects the rates offered by lenders as they are typically indicative of the level of risk in defaulting.