Interest rates refer to charges made by lenders and investors for providing financial services such as moneylending. For example, it may include charges for money borrowed to invest borrowed funds in securities or other financial investments such as stocks, bonds, or taking out insurance or credit cards which incur costs based on an agreed percentage per annum (e.g., 10% per annum) over the term of an agreement.
The interest rate charged on loans depends on several factors, such as the supply and demand of credit, inflation rates, and the interest rate set by the central bank. The central banks determine the interest rates charged on loans and deposits by assessing the quantity of money circulating in the economy.
The central banks have different policies to control inflation, possibly through increasing or decreasing interest rates. This affects other factors such as exchange rates, interest rates on deposits, and their control over lending institutions.
The ideal interest rate will lead to a stable economy, with no significant fluctuation in prices for goods, services, and assets. An ideal interest rate will also increase employment in a country; it will be low enough for businesses to invest but high enough for consumers to spend more.
How Much Should Be the Ideal Interest Rate?
The minimum interest charge is the rate of interest below which a lender cannot charge by the Usury Laws. The maximum interest chargeable is the limit above which a lender may not charge under the Usury Laws. The maximum lawful interest rate does not apply to consumer credit agreements regulated by the Consumer Credit Act 1974.
Personal Loans
The interest rate may not exceed the maximum lawful interest chargeable. However, there are no limits on how much can be charged for any part of a loan. However, there are no limits on the amount that can be set in respect of any overdraft facility provided by a bank or building society.
Mortgages
Interest rates on mortgages range from 6% to 18%, depending on the type of mortgage. However, the lender may charge a mortgage interest rate up to the maximum lawful interest.
Credit Cards
Credit card rates are charged on a pre-set monthly or annual percentage rate (APR). In this case, the interest is calculated on the balance before any fees are applied.
In most cases, the card issuer sets the APR, which may be changed at any time without notice. However, if you pay off your credit card balance in full each month, your APR will be lower than it would have been if you had not paid it in full. Therefore, paying off a credit card in full each month can help you save money on interest charges.
Credit cards typically come with a fixed introductory period of 0% for six months. After that, they change to an initial period of 12 months at 18% APR which can go up to 29%. As per experts at SoFi, “There are usually no penalties for early payment and no fees or penalties for late payment other than paying an additional fee if you pay more than 30 days late.”
