Interest rate: what it is and what are the types of interest rates ?

The interest rate is a basic concept in finance, so in this article we will try to explain what it is and the different types that exist. for a critique

We will also see why it is a very useful fact when comparing different offers of financial products.


Interest Rate Definition

Interest Rate Definition

The interest rate is a relationship between the money that ends up being worth an operation (for example what ends up paying for a loan) and the initial amount of the same (amount of money initially borrowed). It is expressed as a percentage. Normally it is paid month by month and is calculated annually.

This definition shows the annual effective interest rate (ASD), which is the additional amount, expressed as a percentage, that you pay per year.

Additionally, the equivalent annual rate (APR) includes the TEA and also the extra commissions and other charges normally made by the lenders.

A low interest rate is better when requesting a loan, as we will end up paying less. On the contrary, when investing money, a higher interest rate indicates a higher return. With this distinction in mind, you can easily compare between several offers.


Interest Rate Types

Interest Rate Types

Interest rates can be classified as follows:


  • Active interest rate :
    They are presented in all types of credits and loans that the bank grants to its clients. It is called active because it is in favor of the bank.
  • Passive interest rate :
    Unlike the active one, this rate is an expense of the bank, since it is the money that the bank pays its clients for having savings accounts or investments in its entity.
  • Preferential interest rate :
    It is called preferential because it is cheaper than the “normal” or active rate. It is given on special occasions, be it to small entrepreneurs, government projects, emergencies, etc.

According to the inflation rate

  • Nominal :
    It is the interest rate that does not include the loss of the value of money due to inflation.
  • Real :
    Unlike the nominal one, this does include inflation as it is obtained by subtracting inflation from the nominal interest rate.

According to the stability

  • Fixed interest rate :
    It is established at the beginning of a contract, for example the purchase of a home, and remains fixed until the end of the contract.
  • Variable interest rate :
    It changes throughout the duration of the contract.

According to its economic value

  • Positive :
    Above zero It means that the economy is growing.
  • Negative :
    Below zero. It means that the economy is declining.


Interest rates by country

Interest rates by country

Ram is currently operating in six Spanish-speaking and one Portuguese-speaking countries: Spain, Mexico, Colombia, Peru, Chile, Brazil and Argentina.

As you will see below, interest rates vary by country and period.

For example in these graphs of Argentina and Mexico (all rates are annual).

As you can see, the 22 lenders with whom we work in Argentina and the 16 with whom we work in Mexico offer different interest rates.

Some offer a very low rate but in a very long period, while others offer a very high rate but in a very short period and for a very small amount.

Look at the following graphs of Colombia and Spain (all in annual rates).

In Spain there are very high rates, however it must be taken into account that these rates are for small amounts of Euros and even for periods of only one week.

In Colombia things are a bit different, the rates are less expensive but have a longer payment period and for larger amounts.

However we see it, if you cannot review these factors, it means that you will be ignoring a good amount of information and options.

Ram knows that you don’t have the time to review the information and terms and conditions of each financial institution, let alone physically go to each one and ask for this information.

That’s why Ram exists. Just imagine that Ram is a person who knows everything about the lenders we work with. Ram doesn’t care which one you choose, as long as it suits your needs.

This is why Ram asks questions: he needs the answers to get detailed information about what you are looking for.

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