What are the factors that determines interest rates?

Interest rates

What is an Interest?

Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate. Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.(source: Investopedia) . In simple words, When we borrow money, we are expected to pay for using it – this is known as Interest. It is usually calculated as a percentage of the the amount borrowed. The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.

Factors determine Interest rates:

There are different types of interest rates such as, rates that banks offer to their depositors, rates that banks lend to their borrowers in form of diffrents loans( Personal loan, Home loan, Car, Education loan and etc..) , the rate at which the Government borrows in the form of Bond/Government Securities market, rates offered to investors in small savings schemes like NSC and PPF, rates at which companies issue Bonds/Debentures. Interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors that determine the interest rates are as follows:
- The Central bank (for ex. For India it is Reserve Bank of India) and the Government policies.
- Level of Government borrowings
- Demand for money
- Supply of money
- Inflation rate

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