Interest and interest rate

When we talk about savings and loans, interest is a topic that must be discussed. Of course, the service which the bank offers when granting a loan is important, but clients pay most attention to interest rates. Funds which a client borrows from the bank come at a price. They allow the client to purchase commodities or pay for a service, right away, using the loan, instead of waiting to collect enough money. As with other products, this product too depends on many factors.

Interest, simply put, is the price which the borrower pays, for the money taken, to the lender, ie the person who gave the borrower a loan. Likewise, just as banks charge for the money they lend to the borrowers who take a loan from the bank, banks pay to the clients for the money they bring in for saving.

The amount of money borrowed is called principal, while the percentage paid on the account of this principal is called interest rate.

The amount of interest rate depends on the loan type, the period for which the funds are borrowed, trends in the money market, etc. Interest rate changes during as time goes by, as it is affected by the supply and demand in the financial market.

Interest is therefore, the cost og borrowing money, compensation for the creditor due to giving up on his own consumption, and the risk he undertakes when lending his moeny to another. Without interest, there would quite few loans, and the economic activity would be much lower.