What are Interest Rates?

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed.

The rate of interest charged on any loan includes four components:

• The funding cost incurred by the bank to raise funds to lend,
• The operating costs of servicing the loan
• A risk premium to compensate the bank for the degree of default risk; and
• A profit margin on each loan that provides the bank with an adequate return on its capital.

Can my credit score affect the interest charged on my debt?:

Credit scoring is a useful tool in setting an appropriate default premium when determining the rate of interest charged to a potential borrower.

Two other factors also affect the risk premium charged by a bank:

• The collateral required
• The term, or length, of the loan.