What are Interest Rates?
Interest rate can be defined as the amount a bank or a lender charges to the borrower for the use of its assets or money. The rate a bank pays to its depositors for keeping money in a savings account, recurring deposit or fixed deposit is also termed as an interest rate.
Interest rates are frequently charged for mortgages and personal loans, along with loans for the purchase of buildings, cars and other consumer goods. Besides, corporates also take business loans from the financial institution based on prevailing interest rates.
While the term interest rate is used in multiple domains, including cost of borrowing, return on investments and return on savings, it is primarily known for the rate (cash rate or bank rate) charged by Central Banks on its loans and advances to commercial banks. The cash rate further stimulates the rate charged by commercial banks on consumers’ borrowings and saving deposits.
In an economy, interest rates are broadly classified as nominal and real interest rates. While nominal interest rates represent the rate of return to be paid by a borrower without any adjustment for inflation, the real interest rates take inflation into account and reflect the real cost of funds to the borrower.
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