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Have you ever looked at an account statement and failed to understand what all of the jargon meant?
Read on for a step-by-step guide on how your bank calculateshow much to charge you.
How Does Interest Work?
If youre borrowing money, interest is the cost the bank charges you for the service.
Interest vs. APR
Interest is usually given as a percentage per year.
The actual calculations may be more complicated since the bank will split the payments over time during the year.
This means that the APR is the real yearly cost of your loan.
How Do Banks Decide How Much Interest To Charge?
One of the most important factors that determines the interest on your loan or credit card is theU.S.
Thats because a regular consumer bank has to get the money it lends you from somewhere.
Banks borrow from the Federal Reserve and then lend that money to you, for a higher price.
The Fed can either raise rates to fight inflation or lower them to boost the economy.
Secured vs.
Unsecured Loans
Different loans carry different levels of risk and administrative costs for the bank.
This higher risk for the bank means that these types of loans often come with higher interest rates.
Fixed vs.
Variable Interest Rates
A fixed interest rate remains the same throughout the life of the loan or investment.
A variable interest rate can change over time based on market conditions and the Federal Reserves rates.
While variable rates may start lower than fixed rates, they could increase significantly, leading to higher payments.
Common fees include overdraft fees, service fees, late-payment fees and ATM fees.
Heres a breakdown of the various fees.
