What are Interest Rates?
There is a variety of definitions of the economic term the interest rate. Let us bring here the most suggestive ones, in our opinion:
According to the Economics Glossary the interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.
According to The Economist's Dictionary of Economics, the interest rate (or the rate of interest) is the proportion of a sum of money that is paid over a specified period of time in payment for its loan. Thus, it is the price that a home buyer pays to use the money that is not his to buy a house for himself. On the other hand, it is also a compensation that the lender gets for not using this money during the time, which builds up the loan term. The interest rate is calculated according to certain demand and supply.
Paul Heyne, developing this idea at The Library of Economics and Liberty, states the demand as the need for present control of resources by those who do not have it, and the supply as ability of those who have this control and are willing to lend it for a price. And they work together so that they somehow yield a positive rate of interest.
There are two kinds of interest rate. The most common and generally regarded is a nominal interest rate. A nominal interest rate (a nominal variable) is the rate where the effects of inflation have not been accounted for. It is good for the borrower, but not beneficial for the lender since changes in the nominal interest rate often move with changes in the inflation rate, and the lenders want to be sure that they will be able to buy something in the present with the money they have lent in the past. In these terms a real interest rate is a better option for them since with it the inflation is accounted for.
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