Business Basics

October 10th, 2013

Interest Rates

An interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. In a more basic portrayal, interest rates are the primary yardstick for measuring how much money lenders will get for loaning money to you.

The stated interest rate on a loan, or the nominal rate, doesn’t actually tell the whole story behind how much return a lender will get.

Because of inflation, or the rate at which the general level of prices for goods and services is rising, the amount of purchasing power the lender will receive is actually less than it seems. The real interest rate is the nominal rate minus the inflation rate.

Interest rates change primarily by the forces of supply and demand, which are also affected by inflation and monetary policy, or size and rate of growth of the money supply in the country.

– Information compiled by Anthony Ahlegian