Essential vocabulary for those who will talk to banks:
  • Interest rates: Percentage paid or received for the use of money
  • Simple interest rate: Interest only on the initial amount invested or borrowed
  • Fixed rate: Rate that does not change throughout the contract
  • Variable rate: Rate that can rise or fall depending on the market
  • Mixed rate: Combination of a fixed and then variable period
  • Spread: Margin added to the reference rate, used in credit
  • Euribor: European reference index for variable rates

The universe of interest rates includes several types, each one important according to its needs.

The fixed rate is used in credit agreements where the rate value remains the same throughout the term of the agreement. In other words, those requesting fixed-rate credit know exactly how much they will pay each month, regardless of market fluctuations.

Disadvantages of the fixed rate:
  • It may initially be higher than the variable rate.
  • It does not benefit from possible rate drops in the market.

The variable rate fluctuates throughout the contract, depending on a reference index (in Portugal, this is almost always the Euribor) plus a spread. This means that your benefits or returns can increase or decrease over time, depending on the evolution of this index.

Advantages of the variable rate:
  • Possibility of benefiting from drops in market rates.
  • Generally offers lower initial rates.

The mixed rate combines an initial fixed-rate period with a subsequent period in which the rate becomes variable. Typically, the first few years of the contract run at stable rates, and only then do the installments begin to vary according to the market.

Advantages of the mixed rate:
  • Balance between initial predictability and the possibility of savings later.

By understanding what interest rates are and distinguishing the different types of rates, you can protect your budget and get better terms on the contracts you sign.
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