When an individual or group borrows or uses the money of another entity, the borrower has to pay a fee for that use. The rate at which the lender charges is called the interest rate. The interest rate is allowed and regulated by the law.
Interest rates are applied to financial products such as loans and credit card purchases. The general rule is that the interest rate for a specific product is calculated in an annual basis. Even if the repayment period or schedule is not yearly, the annual percentage rate (APR) is used as a general measure to determine whether or not the financial product is reasonably “priced”.
The annual percentage rate is quite important for short term loans such as payday loans, as usually, they have really low advertised rates. These rates are usually expressed in a different way - as surcharges - but when the APR is calculated, the real cost comes out.
Interest rates can be grouped into two general categories - fixed and flexible. Fixed interest rates are determined at the outset. In this scheme, the percentage will not change over the period of the loan. No matter what happens to the economy, the fixed interest rates will not go up or down. On the other hand, flexible interest rates fluctuate depending on the prime lending rate, a figure that is regulated by current federal laws. The advantage in this set up is that if the prime lending rate goes down for a long time, the borrower will have to pay lower interest rates. Naturally, if the reverse occurs, having a flexible interest rate can be detrimental.