Risk

• Risk is a major factor in determining an interest rate. A higher-risk loan needs to have a higher interest rate so that the bank is compensated for its higher chance of default.
  
  

Collateral

• Risk is partly determined by whether the loan is backed up by collateral. A home loan tends to be lower risk because the house serves as collateral and the bank can sell the house in the event of a default, thus recovering at least some of its costs. A credit card, on the other hand, does not have any collateral, thus making it more risky for the lender. That means higher interest rates.
  
  

Loan Cost

• Another interest rate factor is how much the bank itself is spending on the money in question---the higher it pays in interest to a depositor or money market, the more it needs to charge in interest in order to both stay profitable and compensate for the risk mentioned above.
  
  

Competition

• Banks are for-profit entities, competing with one another for market share. Therefore, interest rates are also influenced by the rates at which other banks loan.
  
  

Prime Rate

• The prime rate is the rate at which major banks lend their least-secured funds to their best customers. It is determined by the competition mentioned above, and influences other loan rates in addition to the other factors, such as term length and risk.
  
  

Federal Reserve

• The Federal Reserve influences interest rates by buying or selling U.S. Treasury securities, which in turn influences the rate at which banks loan money to one another. If this rate is higher, interest rates go up as loan costs go up.