How Are Bank Interest Rates Calculated?

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How banks calculate interest rates depends on whether they are lending money to an individual or the individual is lending money to the bank. Find out how good credit and longer terms of investment will often lower interest rates with information from an investment portfolio manager in this free video on banks.

Part of the Video Series: Investing & Personal Finance Tips
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Video Transcript

So, how are bank interest rates calculated? There's two things that are always taken in to consideration when the banks calculate an interest rate, and whether that's giving money to you, or you're giving money to them and they're holding it for you, and that would be the risk involved, and also the time. So if you have a loan that is longer, the rate will actually go up. There's more risk involved with a much longer term loan. A shorter term, they know that the money will be paid off much quicker so your rate would actually come down. The same thing with risk. If your credit is very good, then you'll have a lower interest rate. If your credit isn't so good, then you'll have a higher interest rate. So, you can manipulate both, you know, lending money in terms of a CD, or a savings account with a, with the length of time you put your money in, and also for the type of thing you may be investing in. And also, you can adjust money, the interest rate on loans that you get, when you look at the amount of time that you're taking to pay the loan back, and also where your credit history is.

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