At present, the economic or financial terms that are transmitted through social networks or traditional media can confuse you. So in this article we will explain what the interest rate is, its characteristics, types and situations that merit it, let’s begin.
What is the prevailing interest rate?
The interest rate is the fee or percentage of money that is acquired by investing a specific capital at a financial level. In other words, it is the balance to be paid for using a certain amount of money and benefiting from it, respectively. However, when it comes to credits or loans, the added fee is what the lender receives for the debtor and is considered an interest rate.
In summary, the current interest rate is the one that is regularly issued by organizations or banks to the public, showing the extra percentage of money to be paid.
Characteristics of the current interest rate
There are elements and factors that define the interest rate, here we will show you in a simple way the characteristics it has.
- The interest rate allows to accurately measure the economy of a country, since it works as an economic indicator.
- The interest rate can vary, this can be set as fixed or according to the interest rate that is required and used.
- It stimulates banks or organizations, since a high interest rate can significantly increase savings.
Interest Rate Types
Like the features, there are several interest rates such as the discount rate and others that we will show you here.
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Fluctuating Interest: This is updated monthly and in extraordinary cases every three months.
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Real Interest: This is among the most important within a banking organization, since it is specifically manifested in real interest that is obtained when investing. This is because inflation minimizes the potential for purchases and money loses value.
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Nominal interest rate: This rate is evaluated and capitalized once a year, having varied periods.
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Effective interest rate: In general, this is manifested only once during the year, taking into account the frequency with which it is paid. This joins the capitalization and the reintegration of said interests.
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Official or fixed interest: This is the rate that does not vary at any time and is maintained statically.
Situations that merit an interest rate
There are certain conditions or situations that warrant an interest rate, below we present two necessary cases.
- When a person takes out a loan (personal loan) in order to invest in children’s education or due to illness, they will have to repay the loan plus a percentage of interest for the use of that money.
- Now when a company supports one of its employees through financing by giving them a car, the worker will then have to pay the stipulated amount together with the interest rate that is established.
Elements that imply the interest rate
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It is set by the central bank of a legal area or country, or also by the different states that make up that nation.
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Effective bias for liquidity, since while the asset is illiquid, investors are more likely to demand more compensation. On the other hand, shareholders demand high reimbursements for long-term investments.
- The risk linked to the type of fixed asset induces demands from shareholders for a higher interest rate in order to face greater risks.
Factors Affecting Market Interests
- The policy or law of supply and demand established by the market.
- Cash flow bonus.
- Liquidity premium.
- predictable inflation.
- Bonus for credit vulnerability of the issuer.
Finally, the current interest rate is part of the financial movements that are made in organizations such as commercial banks and companies. In addition, these are classified into various types of rates issued and regulated by the laws that are handled in a country.
