The interest rate is what a bank or lender will charge a borrower (you) to lend them money. Interest rates are heavily dependent on if the debt is secured (car/home loan) vs. unsecured (credit cards).
Unsecured Loans:
- Interest rates tend to be higher given the greater risk to the lender.
- Interest rate can change over time based on payment history (can increase if payments are not made on time).
- Interest rate tends to be higher (and may change over time) as the lender typically gives the borrower the options to increase and decrease debt levels (the debt balance on your credit card) relatively easily and freely.
Secured Loans:
- Interest rates tend to be lower as the lender or bank can repossess (take away) the underlying asset (car or house).
- Total debt amount and interest rate tend to be fixed and determined at beginning of the contract. Given the reduced flexibility, the interest rate tends to be lower.
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