Regardless of whether rates are generally high or low, some rates are higher than others.
The interest rate that you pay on a car loan typically is higher than the interest rate that you receive on an account in a savings bank, for example, and the interest rate on a credit-card balance is higher than the rate on a new-car loan.
Several major factors explain these rate differences: risk, duration, tax considerations, and other characteristics of a loan.
Risk
One risk that a lender faces is that of not being repaid. The greater the chance that you won't be repaid, the higher the interest rate you will have to charge as compensation for taking the risk. On the other hand, if a loan involves little risk, you would be willing to accept a lower interest rate. That's why the federal government can borrow at lower rates than can private parties. People are sure the government will pay its debts.
Some lenders reduce the risk of losing what they have lent by requiring the borrower to pledge collateral, property that the lender can take possession of if the borrower doesn't repay the loan. The risk is smaller in such "secured" loans than in unsecured loans, so the interest rates are lower, too. Auto loans, for example, carry lower rates than credit-card loans, because the lender can take possession of the car if the borrower fails to pay.
When you apply for a loan, you often have to fill out a form on which you provide information that the lender can use to determine how likely you are to be able to repay the loan. Similarly, there are business firms that rate the creditworthiness of individuals, other firms, and even governments; lenders use this information to determine what rates to charge on loans.
Duration
The longer the duration of a loan, the more likely the lender is to desire access to the funds. So lenders typically have to be compensated with higher interest rates for parting with their funds for longer periods.
The longer the duration of a loan, the greater the uncertainty over whether the borrower will be able to repay the loan. So, lenders have to be compensated for the greater risk with higher interest rates on longer-term loans.
Inflation is a major factor determining the level of interest rates. The longer the duration of the loan, the greater the risk that inflation can accelerate, reducing the purchasing power of the loan repayment. So, rates generally are higher on long-term loans than on short-term loans, because people who lend for longer periods have to be compensated for the risk that inflation might accelerate during the longer periods.
Tax Consideration
If you receive interest income, you are more concerned with how much of the income you can keep than with how much the borrower pays. You are concerned with after-tax income -- that is, the interest you receive minus any taxes you have to pay on that interest.
Interest on some types of loans has some tax advantages. Interest on loans to state and local governments is exempt from the federal income tax, and interest on loans to the federal government (such as the interest you receive on U.S. Savings Bonds) is exempt from state and local income taxes. These tax advantages help governments borrow at lower interest rates than individuals or businesses.
Other Characteristics
When you put money into a bank account, you are allowing the bank to use the money. There are different types of bank accounts, though, and they pay different rates of interest. An account that allows you to write checks, for example, provides you with a benefit, so it pays a lower rate than a savings account, which does not offer this benefit.
If you agree to leave your funds in a savings account for a specified time - two years or five years, for example - you are providing the bank with some benefits. The bank knows for certain that it will keep your deposit, and it knows it can use the funds longer than if you had deposited them in, say, a checking account. In return, the bank will pay you a higher rate than on an account from which you can withdraw your funds at any time.
Suppose you lend to someone and suddenly you need the money back. It would be advantageous to you to be able to convert the loan into money quickly and without losing much of what you have lent. Loans that can be converted into money quickly and without a loss (either because you can demand that the borrower repay the loan at any time or because you can sell the loan to someone else) carry lower rates than other loans.
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