How do 'interest rates' get created in the first place?
- danxp2Lv 63 months agoFavorite Answer
By an agreement between 2 people, or artificial intelligence machines, so that the lender will agree to give the borrower X money today for Y money at some future date.
Because people were offering interest day/weeek/month/quarter/semi-annual/annual that was confusing to the customer what the abbreviation was. To help fix this the USA requires the annual rate of interest to be clear on loans now so you can compare 1 loan option to another option.
- 2 months ago
As it turns out. The Demand for Credit drives the cost of the loan. So low demand for credit = low interest rate. High demand for credit = high interest rate. The interest rate itself is determined by competition in the market rate. Too high and nobody borrows. And the interest rate is a barometer as how well the economy is doing.
- A.J.Lv 73 months ago
People and businesses want to spend money they don't have yet. Say to buy a house, few people can or want to pay the price in cash. A borrower and lender work out that payback will be more than money loaned.
Situations become common or grouped. A history of paying back loans makes a credit rating that future loans will be paid back also. There is a risk-return expectation, and earning more, and loan collateral affect rates. There is also government debt, and auctions of debt and resale of debt. Interest rates of a market change over time based on supply and demand of money.
A long time ago, certain religions demanded that charging interest was immoral. This tenet was not in Judaism, and many learned to fill a gap in the economic system.
In Islam, interest is immoral, but trading is fine. So the extra money pay back is not "interest", it is returning a higher value in a return of money.
It is based on the time value of money. The same amount in a future is worth less than now. If there was no inflation, the interest fees would be far lower. It would only be in administration, and risk of not being paid back.
- Anonymous3 months ago
By artificial intelligence