Interest rates

Credit card, mortgage, and loan---- what do these things have in common? Interest rates, of course!

Interest rate is the service fee charged by the lender to a borrower. It is usually expressed as a percentage of the principal amount or the total money borrowed.

For instance, person A loans $100 to person B. Person B, being the lender, can then ask person A to pay an additional 10%. In this set up, the $100 is considered as the principal amount. The additional 10% on the other hand, is the percentage rate. This means that person A would have to pay person B a total of $110.

An interest rate is actually a compensation for taking a risk. Remember that with every loan, there is always a risk that the borrower would not pay the money back. The interest rate acts as the compensation that the lender will receive for risking his money to the borrower.

Interest rate plays an essential role in the monetary policy. In fact, it is used to indicate economic variables such as inflation as well as investment. The reason behind is that the economy grows whenever the consumer spends more. This means that a low interest rate would mean more borrowing power to the consumer.

Similarly, a higher interest rate can help balance the demand especially if it is outpacing the supply. By simply increasing the interest rate, the amount of money entering the market will be controlled.