What are interest rates
As with everything in economics, there are several competing definitions for the term interest rates. Interest rates can be explained as:
- The amount charged, expressed as a percentage of the total or outstanding loan amount (principal), by the lender to the borrower for the use of assets. Assets borrowed can include cash, consumer goods or large assets such as vehicles or property.
- The interest rate is calculated by dividing the amount of interest by the principal. The interest rate charged on the principal is dependent on the individuals risk profile, lower interest is charged on lower risk and higher interest is charged on higher risk. Interest rates often change as a result of inflation, Reserve Bank policies, and supply of or demand for credit.
Generally, interest rates for access to credit cards, mortgage or loans are charged on an annual basis, known as the Annual Percentage Rate (APR). Conversely, when consumers earn interest for savings or investments the interest rate is expressed as an Annual Percentage Yield (APY).
The South African Reserve Bank defines interest rates, in simple terms, as the "prices for loanable/funds - prices of funds invested, lent out or borrowed for various periods of time". The supplier or lender of funds normally wants to earn an income and the user or borrower will generally be prepared to pay for the right to use the accumulated funds.