Understanding Interest Rates: A Comprehensive Guide by TDECU | TDECU (2025)

Interest rates are a fundamental aspect of personal finance and the economy. Whether you are saving money, borrowing for a home, or investing, understanding how interest rates work can help you make smarter financial decisions.

In this blog post, we will explore the various types of interest rates, how they are determined, and their impact on your financial life.

What Are Interest Rates?

Interest rates represent the cost of borrowing money or the reward for saving money. When you take out a loan, the interest rate determines how much extra you will repay the lender. Conversely, when you deposit money in a savings account, the interest rate dictates how much you will earn over time.

Interest rates are typically expressed as a percentage. For example, if you borrow $1,000 at an interest rate of 5% per year, you will owe $50 in interest after one year. This concept is crucial to grasp, as it influences everything from personal loans to mortgages and credit card balances.

Types of Interest Rates

There are two primary types of interest rates: fixed and variable.

Fixed Interest Rates: As the name suggests, fixed interest rates remain constant throughout the term of the loan or investment. This predictability can benefit budgeting, as you know exactly what your monthly payments or earnings will be. Fixed rates are common in mortgages and car loans.

Variable Interest Rates: Variable interest rates, also known as adjustable rates, can change over time. They are typically tied to an index, such as the prime rate or the London Interbank Offered Rate (LIBOR). While variable rates can start lower than fixed rates, they are at risk of increasing over time. This type of rate is often seen in credit cards and adjustable-rate mortgages (ARMs).

How Are Interest Rates Determined?

Several factors, including economic conditions, government policies, and market demand, influence interest rates. Central banks, like the Federal Reserve in the United States, play a significant role in setting interest rates. They adjust rates to control inflation and stabilize the economy.

When the economy is strong, central banks may raise interest rates to prevent overheating and keep inflation in check. Conversely, they may lower rates during economic downturns to encourage borrowing and investment. These decisions impact financial institutions' interest rates, including credit unions like TDECU. Check out TDECU's rates.

The Impact of Interest Rates on Borrowing

Understanding how interest rates affect borrowing is essential for managing debt effectively. Higher interest rates mean higher borrowing costs, making loans more expensive. This can affect your ability to purchase big-ticket items like homes and cars.

For example, consider a 30-year fixed mortgage for $200,000. If the interest rate is 4.00%, your monthly payment would be approximately $954. However, if the rate increases to 5.00%, the monthly payment would be about $1,074. Over the life of the loan, this difference amounts to thousands of dollars in additional interest.

The Impact of Interest Rates on Savings and Investments

Interest rates also play a crucial role in savings and investments. Higher interest rates can lead to better returns on savings accounts, certificates of deposit (CDs), and other low-risk investments. This encourages people to save more, which can help build financial security over time.

For example, if you deposit $10,000 in a savings account with a 1% interest rate, you will earn $100 in interest after one year. If the interest rate rises to 4%, you will earn $400. This simple example illustrates how even small changes in interest rates can significantly impact your savings growth.

Strategies for Managing Interest Rates

Adopting effective strategies for borrowing and saving is important to navigate the complexities of interest rates.

For Borrowing:

- Shop around for the best rates. Different lenders offer varying interest rates, so it's worth comparing offers.

- Consider fixed-rate loans for stability, especially in a rising rate environment.

- Pay down high-interest debt first, such as credit card balances, to minimize interest expenses.

For Saving and Investing:

- Take advantage of high-yield savings accounts or CDs when interest rates are favorable.

- Diversify your investments to balance risk and reward. This can include a mix of stocks, bonds, and other assets.

- Monitor economic trends and adjust your strategy as needed. For example, consider locking in higher rates on long-term savings products when rates are expected to fall.

Conclusion

Understanding interest rates is vital for making informed financial decisions. Whether borrowing money, saving for the future, or investing, the interest rate environment can significantly impact your financial outcomes. By staying informed and adopting smart strategies, you can make the most of interest rates' opportunities.

At TDECU, we are here to help you navigate these complexities. Our team of financial experts can provide personalized advice and solutions tailored to your unique needs. For more information, visit our website or contact us today.

Remember, knowledge is power when it comes to your finances. Stay informed, plan ahead, and make decisions that will set you up for long-term success.

Understanding Interest Rates: A Comprehensive Guide by TDECU | TDECU (2025)

FAQs

How do you interpret interest rates? ›

Interest affects the overall price you pay after your loan is completely paid off. For example, if you borrow $100 with a 5% interest rate, you will pay $105 dollars back to the lender you borrowed from. The lender will make $5 in profit.

What is the interest rate at TDECU? ›

1.90% - 5.15%
Term LengthInterest RateAPY1
3 months1.88%1.90%
6 months2.37%2.40%
12 months5.03%5.15%
18 months4.55%4.65%
5 more rows

What is interest rate for dummies? ›

Interest is essentially a charge to the borrower for the use of an asset. Assets borrowed can include cash, consumer goods, vehicles, and property. Because of this, an interest rate can be thought of as the "cost of money"—higher interest rates make borrowing the same amount of money more expensive.

What are the two different types of interest rates? ›

What are the Different Types of Interest? The three types of interest include simple (regular) interest, accrued interest, and compounding interest. When money is borrowed, usually through the means of a loan, the borrower is required to pay the interest agreed upon by the two parties.

How do you explain interest rates simply? ›

To put it simply, interest is the price you pay to borrow money — whether that's a student loan, a mortgage or a credit card. When you borrow money, you generally must pay back the original amount you borrowed, plus a certain percentage of the loan amount as interest.

What is a good interest rate number? ›

A good interest rate on a personal loan is anything lower than the market's average rate. But a good rate for you depends on your credit score. For example, if you have excellent credit, a rate below 11 percent would be considered good, while 12.5 percent would be less competitive.

What bank is paying the highest interest right now? ›

Best High-Yield Savings Account Rates for August 2024
  • Ivy Bank – 5.30% APY.
  • TotalBank – 5.26% APY.
  • Jenius Bank – 5.25% APY.
  • Newtek Bank – 5.25% APY.
  • Evergreen Bank Group – 5.25% APY.
  • VirtualBank – 5.25% APY.
  • CFG Bank – 5.25% APY.
  • Upgrade – 5.21% APY.

Who pays higher interest rates banks or credit unions? ›

Credit unions tend to offer a higher interest rate on savings. This is because they are not focused on making profits, but only covering their operating costs.

Which bank is best for interest rates? ›

Comparison of FD rates
  • AXIS Bank. 5.75% - 7.00%
  • SBI Bank. 5.50% - 6.50%
  • Equitas Bank. 3.50% - 7.25%
  • HDFC Bank. 4.50% - 7.00%
  • ICICI Bank. 4.50% - 6.90%
  • Canara Bank. 5.50% - 6.70%
  • Bank of Baroda. 5.50% - 6.50%
  • Punjab National Bank. 4.50% - 6.50%

What are interest rates simple? ›

The simple interest rate formula (also referred to as an amortizing rate) calculates the interest owed on a daily or monthly basis. The amount of interest you pay each month is calculated based on your actual outstanding balance on the day your payment is due.

How to make your interest rate go down? ›

7 ways to get a lower mortgage rate
  1. Shop for mortgage rates. ...
  2. Improve your credit score. ...
  3. Choose your loan term carefully. ...
  4. Make a larger down payment. ...
  5. Buy mortgage points. ...
  6. Lock in your mortgage rate. ...
  7. Refinance your mortgage.

How do you explain interest rate on a loan? ›

An interest rate is the cost you pay to the lender for borrowing money to finance your loan, on top of the loan amount or your principal. The higher the interest rate, the more you'll pay over the life of your loan.

What is the interest rate right now? ›

Weekly national mortgage interest rate trends
30 year fixed6.86%
15 year fixed6.30%
10 year fixed6.27%
5/1 ARM6.43%

What type of interest is best? ›

Which Is Better, Simple or Compound Interest? It depends on whether you're saving or borrowing. Compound interest is better for you if you're saving money in a bank account or being repaid for a loan. If you're borrowing money, you'll pay less over time with simple interest.

How to get effective interest rate? ›

Effective annual interest rate = (1 + (nominal rate ÷ number of compounding periods))(number of compounding periods) – 1.

Is it better to have a lower or higher interest rate? ›

Low interest rates are better than high interest rates when you're borrowing money, whether it's with a credit card or a loan. High interest rates are only good when you're able to earn interest, such as when you put money in a savings account, checking account, CD or money market account.

How do you interpret real interest rate? ›

A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate and the inflation rate: Real interest rate = nominal interest rate - rate of inflation (expected or actual).

How do you interpret effective interest rate? ›

The effective annual interest rate is the true interest rate on an investment or loan that accounts for the effects of compounding. The more frequent the compounding periods, the higher the rate. A savings account or a loan may be advertised with both a nominal interest rate and an effective annual interest rate.

What is a good percentage for interest rate? ›

Avoid loans with APRs higher than 10% (if possible)

“That is, effectively, borrowing money at a lower rate than you're able to make on that money.”

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