Fixed, variable and introductory interest rates

0:00- [Instructor] When people lend you money, they're usually not doing it out of the goodness of their hearts, they're usually doing it to make some money. And the money that they charge you to essentially get their money, is interest, and we've talked about this in other videos.

0:13Now, how much they're charging you based on how much you borrow, that's the interest rate. But is this video's title implies, there's multiple ways that they can charge you those interest rates. The first, and maybe in some ways the simplest, is a fixed interest rate.

0:29This is where you're just paying a certain amount on the amount that you borrowed, and that rate does not change. So for example, it might just be 7% on your balances, and there's different ways of calculating it depending on when it's compounding, et cetera, et cetera.

0:43But that rate, however it's calculated, is not going to change. They're gonna charge that same rate on the amount that you have borrowed or the amount that you have left to pay back. Now the place that you see fixed interest rates, it's typically in something like a home mortgage, home mortgage.

1:00You'll also see this in car loans. And this is great because it is very predictable. You have a good sense of your interest not changing, and you could also think about your payments. Your interest in the payments aren't necessarily the same thing because above and beyond the interest, you're also usually paying off the home or the car loans.

1:20You do have interest only loans where you don't pay that off where you're only paying the interest, but that's a little bit more unusual and don't recommend it because it's good to be paying down your debt. Now, the other type of interest that you see from the title is variable interest.

1:36Now, this is interest that will change depending on market conditions as the name implies. So this will change. And the types of loans that you'll typically see here are things like credit cards, credit cards. Things like private student loans, if you were to get student loan money from, say a bank, it's not government subsidized loan, private student loans.

2:04And if generally speaking, the interest rate environment increases, those interest rates tend to increase. If the interest rate environment decreases, those rates tend to decrease. Now, you might want to give up the predictability if you think, well one, if you're getting a better rate than on a fixed rate, or if you think interest rates are likely to go down.

2:26But that, once again, you're speculating a little bit on what might happen. Now, you can also see variable interest rates with things like a home mortgage. You might have seen, let me do this in another color. You might have heard something like an ARM that stands for adjustable rate mortgage.

2:45And you'll often hear someone say something like this is a 5-1 ARM. What that means is, is that the interest rate will be fixed for the first five years, and then every year after that, it's going to be reset depending on what the market conditions for interest rates are.

3:04So you might say, why would someone want to do say a 5-1 ARM, or a 10-1 ARM, or a 3-1 ARM instead of just doing a fixed rate home mortgage? Well, it might be the situation where this is a lower interest rate, lower interest rate, and even though after the fixed portion there is some unpredictability, maybe you plan on selling that house within the fixed portion.

3:30You might have a 10-1 ARM, so you have 10 years of fixed interest and maybe it's lower than a fixed rate mortgage. And he's like, "Well, I think I'll probably sell it within that 10 years." But once again, you don't always know that and then your interest will adjust after that.

3:43Or you might even think it might adjust down. But once again, you are speculating a bit. Now the last thing I will talk about is the last thing in the title of this video, introductory interest rates. And you'll see this often times on things like car loans, credit cards especially, and this is something where people are trying to create an incentive for you to borrow from them.

4:02And they'll say, "For the first six months, or for the first year," oftentimes furniture stores, I've seen this a lot, "first year, we have 0% APR." And that's not just to borrow money from you, they're actually trying to get you to buy the furniture and not think about how much it costs in the short term.

4:18And that's, once again, it's usually to provide motivation. But when a credit card does it, it's because their statistics are usually showing that even though the first six months or 12 months, whatever they're giving you for that introductory rate might be a very low interest rate, they're then going to up the interest after that.

4:34Now, if you're really good about it, if you're saying, "I'm gonna pay that down in that introductory period." It could make a lot of sense. Or some people I know, and this takes a lot of work and I don't necessarily recommend it. Some people keep switching credit cards in order to get those introductory interest rates.

4:49But once again, you mess up a little bit, you might be in for some late fees or your interest rates might go up a lot. But it's good to think about it, the fixed in the variable are the main types of ways that people will charge you interest. Introductory interest rates, they are what what it sounds like, it's for a fixed period of time, usually to motivate you to either borrow money from someone or to make a purchase with them, but be very careful about what happens after that introductory period.