Interest

Interest is the price of the immediate availability of money. Money is a strange commodity that has a time value there is Money now is usually more expensive than money later, because a lot can happen with that money in the meantime. The difference between today's and future value of money is paid or received in interest.

Interest is the price of the time value of money, which is always determined as a percentage of current money. The money time value in the simplest terms, it means that a money today (USD, EURO, etc.) is worth more than the same money at a later date, because until that later date the owner of the money can do many things with his money. 

For example, you could invest on which you could earn up to 10 percent in a year. And for this owner of money, if his investment were secure in yield, you wouldn't think of lending this money to someone for less than 10 percent interest. 

The emphasis is on if you are "sure of the return on your investment". Typically, you cannot be sure of this, you just have some sort of idea that it will succeed. One of the factors determining the interest rate is therefore based on expectations and estimates, there is some risk that must be taken into account when deciding on a loan. 

The same is true if we assume that money loses 10 percent of its value in one year, 10 percent will be inflation. So, if we calculate that, for example, instead of 10 loaves of bread today, we would only get 9 loaves of bread a year from now, we would think twice about whether to lend our money, but we would certainly ask for enough interest to buy at least 10 loaves of bread next year. 

However, inflation can be considered a general characteristic of the economy, except for very rare years, its rate is greater than 0%. There are relatively good estimates and market consensus on exactly what kind of inflation to expect, the for central banks and they not only have inflation expectations, but also the means to influence it. The part of the interest that exceeds inflation a real interest rate. The latter is essentially what the lender wins. 

It can be seen that the rate of interest expected by the lender always depends on his expectations. It is also natural that the lender always wants to achieve some level of real interest, even interest above inflation, since everyone wants to do well. At the same time, an interest rate equal to inflation only means that one year from now you can buy exactly the same goods with your money that you could buy with it now. If inflation is 5 percent, then 6 percent interest is not much either. If inflation is 2 percent, then even 5 percent interest can be a lot. 

The third determining factor of the interest rate is that there is also a risk of repayment. It is possible that the person to whom we lend our money finds himself in an unexpected difficult situation and - despite his best intentions - does not know how to credit and the credit interest pay. If we loan to sufficiently diverse actors (many people, many companies), then this risk becomes relatively easy to calculate. Banks, for example, are in such a position of creditor in many ways, which is precisely why they can calculate the risk of non-payment quite well. This factor also appears in the interest charged by banks on loans, one of its determining factors is interest surcharge.