What are Interest Rates?

Published: 04/02/24

Hello! Today’s topic is: Interest Rates

An interest rate is a percentage of money that a borrower has to pay back to the lender. When you take out a loan from the bank, they give you an interest rate which makes you pay additional money the longer it takes for you to pay back the loan. It is important to understand these percentages in order for you to make sure you are out of “bad debt”.

“Bad debt” is a term I like to use when talking about debt with high interest rates. These are your student loan and credit card type debts. For example, if you wanted to take a new undergraduate loan, the current federal interest rate is 6.53% per year!! This is an insanely high number, so it is important for you to focus all of your money towards relieving that debt.

On the other end of the spectrum, there is “good debt”. This is debt that has super low interest rates such as a mortgage. The average 30 year mortgage rate is about 7%. So one year of holding on to student loan debt would have roughly the same interest rate as 30 years holding on to your mortgage debt. This means paying off your mortgage can be done slowly, overtime, with no need to rush or emphasize clearing that debt.

The key is to stay organized. In today’s day in age, there are so many different types of expenses and debts that have to be managed. I recommend ranking which debts have the highest interest rates and tackling those first.

As always, remember, the early you invest, the more compound interest will help you make more money. This works both ways too. If you have a pile of debt and are not keeping up with the payments, the amount is going to snowball, and the higher the interest rate, the faster it is going to snowball.