Fundera Whiteboard Series: What is an Interest Rate?

Ben Johnson

Content Marketing Manager at Fundera
Ben Johnson is the Content Marketing Manager at Fundera. He specializes in data-driven and life hack pieces to help business owners prepare for the future.

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You’re watching TV one day and the newscaster announces “The Federal Reserve has decided to raise the Federal Funds rate .25%.” The next day you get a letter in the mail about a credit card offer with an advertised 0% intro APR. Later that month, you decide to shop for a loan for your small business on Fundera.com.

What do these 3 situations have in common?

They all rely on interest rates.

But what is an interest rate, really?

Specifically for small business loans, it’s the percentage charged by a financing company to a borrower for lending a sum of money. An interest rate is quoted as a percentage of the amount of money you borrow. So how do interest rates work? Let’s see it in action!

Let’s say you borrow \$10,000. The interest rate is 10%. The term is 2 years—with monthly payments and no other fees.

To get your monthly payment—plug in the interest rate, term of the loan, and principal amount borrowed—into a loan calculator.

Based on that, we’ll see that for this loan your monthly payment will be \$461.45. When we multiply this number by 24, we see that we’re paying back \$11074.78 to borrow \$10000. So we’re paying \$1074.78 in interest over the term of the loan.

So in summary: an interest rate is the cost of borrowing money. It’s what you’ll use to calculate the total amount you’ll owe the lender for using their money.

Still confused? Let us know in the comments. If we answered your question, give us a like, a share, or subscribe to our YouTube channel.

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Ben Johnson

Content Marketing Manager at Fundera
Ben Johnson is the Content Marketing Manager at Fundera. He specializes in data-driven and life hack pieces to help business owners prepare for the future.