Significance

The interest rate charged to the loan can greatly affect the overall expense incurred with the debt. The higher the rate, which is considered a percentage of the loan, the more money it takes to repay the debt.

Function

The interest rate is one of the fees associated with the loan that the lending institution charges to make a profit on the loan. The lending institution usually borrows the money and charges the borrower a rate higher than the one they were charged in order to turn a profit.

Time Frame

The interest rate is charged over the life of the loan. Short-term loans, such as a credit card or car loan, usually carry higher interest rates than longer term loans, such as mortgages. A short-term note is amortized over five years or less, a long-term loan is considered to be 10 years or longer.

Considerations

It is in the borrower's best interest to negotiate an interest rate as low as possible. This is done through comparing rates. Additionally, the borrower can qualify for the best rate by having a high credit score. Any score above 720 is considered to be high.

Warning

Interest rates can be fixed or variable. A fixed interest rate stays the same throughout the length of the loan. A variable interest rate, however, can change at predetermined intervals over the life of the loan. A variable interest rate can be dangerous if the borrower has borrowed a large sum of money.

Source:

InvestorWords.com

Federal Reserve Bank of New York