One form of interest familiar to most of us is on our credit card purchases. We are charged a monthly interest rate on our unpaid balances. If you spend $100, you will be charged interest each month for the portion of the original loan remaining. If you pay $20 on the loan in the first month, you will reduce the loan to $80. The next month, however, you will have to repay $80 plus the monthly interest.
The Federal Reserve Bank sets the interest rates. These are raised when the economy is heating up. This has the affect of decreasing consumer spending by adding greater interest to financed purchases. When the economy begins to slow down, interest rates may be lowered by the Federal Reserve Bank to increase consumer spending. With lowered rates, consumers tend to use their credit cards more often and finance more purchases of major appliances and cars.
Interest rates vary. You may have a fixed rate of interest. This where the lender sets the rate of interest when the loan is made. The rate never changes over the length of the loan. If you borrow, $100, you agree to repay $100 plus interest, 10% for example, over a fixed period of time. The total amount of the loan...
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