Interest Rates – What is the interest rate?

What is the interest rate?

What is the interest rate?

An interest rate is an income paid by a money borrower, to the organization that lends him money.

Both natural and legal persons can borrow money from a financial institution.

The greater the risk of non-repayment for the bank or credit institution, the higher the interest rate will be.

Definition of an interest rate

Definition of an interest rate

An interest rate is a number expressed as a percentage, which is paid by a borrowed person, state or corporation to the organization that loaned the money.

It is in a way a remuneration or a counterpart of the risk engendered by the lender. To counterbalance this risk, interest rates have been put in place.

It can be defined at the time the loan / loan is created, and therefore the contract signed. It is then called nominal interest rate, and is thus annual.

But an interest rate can also be created based on risk premiums and the rate of inflation. It is called real interest rate.

Who sets the interest rates?

Who sets the interest rates?

Interest rates are influenced by the key rate, which is defined by the Portar Central Bank (PCB). The PCB advises and supervises the banks of the member states of the European Union. The PCB adjusts its key rate according to different elements: inflation for example.

The PCB lends money to the various European banks, which then lend to companies, or individuals. Other criteria are taken into account when setting interest rates: risk premiums for example, or the duration of the loan.

Fixed rate, variable rate, revisable rate

Fixed rate, variable rate, revisable rate

There are different types of rates, so you should check before you borrow:

  • Fixed rate. The repayment conditions are decided at the signing of the contract. It’s a stable rate, which does not change over time.

  • Variable rate. This rate evolves along the duration of the loan, it is re-evaluated according to the different rate levels on the market. It can go up or down.

  • Mixed rate. It is a mixture of the two rates described above. In the first years, the rate is fixed, then it becomes variable, with however a limit that can not be exceeded.

The range of financial institutions have different borrowing policies, with different conditions. It is therefore necessary to learn about the terms and conditions, before committing, whether you are an individual or a company.

Leave a Reply

Your email address will not be published. Required fields are marked *