Interest rates

Since many enrolled in the clergy are pursuing avarice and shameful profit, and have forgotten the saying of Sacred Scripture: “who has not given his money in usury,” and when they offer loans, they charge a percent, this holy and great Synod justly establishes that if anyone will be found, after this definition, to receive usury or to transact business by any other invention or means whatever, so as to charge fifty percent or in some other way to contrive shameful profit from credit, he shall be deposed from the clergy and removed from the enrollment.

Canon XVII of the First Ecumenical Council of Nicea, AD 325

 

Victor Dubreuil - 'Money to Burn', 1893

Victor Dubreuil – ‘Money to Burn’, 1893

Put simply, interest rate is the fee you have to pay to borrow money. It is like paying rent for the money that you are borrowing. It is the cost of using the money which is not yours.

In other words, interest rate is the amount a borrower (the demand side) pays to hold a certain amount of money for a certain period of time from the lender (the supply side). Interest rate is expressed as an annual percentage rate.

The borrowers also know the interest rate as the cost of debt, while the lenders refer to it as the rate of return.

Imagine that you have a noble idea to establish a start-up which can turn into a profitable business. The idea is yours and you also have the knowledge and experience to make it work, but the initial investment needed to get the start-up running is too much for you. So what would you do? Most probably, you would go to a bank and register for a loan. If everything goes well, you will receive the money you need to start your business. But why would the bank lend you this money? Simply because they will charge you for this money, and this so-called fee that you have to pay to be able to use that money is known as the ‘interest rate’.

On the other hand, when you open up a savings account in a bank, and deposit some money in it, you are giving the bank permission to use your money. In return, the bank gives you an interest rate on your balance. The bank itself will lend this money to those who need it, and charges them a certain amount. The difference between the rate of lending money and the rate of borrowing money is the profit of the bank.

 

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Further reading

Interest rates explained

Interest Rates Guide

How Interest Rates Work

Interest Rates Explained: 9 Questions You Were Too Millennial To Ask

How Money Supply and Demand Determine Nominal Interest Rates

Part I of IV—A Brief History of World Credit & Interest Rates

How Interest Rates Were Set, 2500 BC – 1000 AD

The 5,000-year history of interest rates shows just how historically low US rates are right now

So how did usury stop being a sin and become respectable finance?