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To understand interest rates you need to understand what interest is. Interest is the fee you pay for the temporary use of someone else's money. Basically, if you borrow money, you are responsible paying that sum of money back (the principal), plus a fee (interest) for borrowing the money. Interest Rates are determined in several ways. The rate in which the borrower must pay the interest is expressed as a percentage of the principal per year. For example, if you borrow $1,000, and your interest rate is 10% per year, you must pay $100 in interest. In determining the rate of interest, the lender can set a [[How do car loans work?#fixed rate car loan|fixed rate]], which is a rate they choose, and the loan's interest rate remains at that percentage for the life of the loan. Or the lender can set a [[How do car loans work?#variable rate car loans|variable rate]], in which the interest rate is tied into the [[interest rate index]] and can change periodically.

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