A financial institution determines the interest rates it charges on its loans by evaluating its cost of funding (the interest it has to pay to borrow money from various sources), its operating expenses and a profit margin. Financial institutions fund their loans from a variety of sources, including consumer and corporate deposits and interbank borrowings. Since interest rates can vary significantly between financial institutions, consumers should compare the interest rates offered by lenders. Calculating the Cost of Borrowing The advertised rate of interest on loans does not usually give a good indication of the true cost of a loan, since fees and different ways of calculating the interest charges.
