Interest refers to the monetary reward/ payment to capital as a factor of production for its contribution in the production process.
Interest rate refers to the proportion of capital borrowed that must be paid to the lender in addition to the principal as a reward to capital as a factor of production.
FACTORS THAT INFLUENCE INTEREST RATES IN MY COUNTRY
- The supply of loanable funds. Loanable funds refer to the amount of money available in financial institutions for lending purposes. The higher the supply of loanable fund, the lower the interest rate and the lower the supply of loanable funds, the higher the interest rate.
- The demand for loans. The higher the demand, the higher the interest rate and the lower the demand, the lower the interest rate.
- Government policy towards lending (Bank rate). The government reduces the rate so as to stimulate economic growth. By reducing the rate, consumers borrow and spend more and the growth rate increases. To avoid over heating of the economy, the government increases the rate again.
- Objective of the lender. Various lending institutions charge different interest rates. Greed for profits by the institutions leads to high interest rate and where institutions are not greedy for profits, the interest rate is low.
- Size of the loan. The smaller the size of the loan, the higher the interest rate and vice versa.
- Period of loan repayment. The longer the period, the higher the interest rate and the shorter the period, the lower the interest rate.
- The rate of inflation. The higher the rate of inflation, the higher the interest rate and the lower the inflation rate, the lower the interest rate.
- Number of financial institutions. The greater the number of financial institution, the lower the interest rate and the smaller the number of financial institutions, the higher the interest rate.
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