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What is Interest Rate definition/concept

The interest rate concept is directly related to the value of money. In this sense, the amount or amount of money is related to a financial transaction. Thus, when a person deposits an amount X in a bank, the interest rate is equivalent to the percentage of the money received in exchange, but when someone requests a loan to buy something, it refers to the amount that must be paid by the borrower to the bank.

An individual , a company or a government may need money and for that they request a loan, which is subject to a certain type of interest , which means the cost that must be paid to receive the requested money (the cost of money is precisely the interest rate).

Interest rates hit the economy as a whole

The decision to raise or lower interest rates is generally adopted by the central banks of each country. Central banks determine a specific rate for lending money to various national banks, consequently, the less national banks are paid for the money requested, the lower will be the amount charged to their customers. Obviously, this circumstance has effects on the entire economy: the use of credit cards , mortgages, credit applications for the purchase of goods, among other circumstances of a financial nature. Interest Rate

As a general rule, when interest rates are low, they usually have two consequences: stock prices rise and construction prices rise as well. On the other hand, the decline in interest rates is associated with the devaluation of some currencies, especially the dollar.

Why are interest rates lower?

Economists consider that in the economy as a whole there is a decline in the interest rate for two fundamental reasons:

1) Because price levels and inflation tend to fall;

2) Because there is a generalized economic slowdown and, as a result , there is an attempt to stimulate the economy by reducing interest rates.

Conversely, when there is an economic boom, central banks raise the price of the currency to cushion this growth.

Interest rates can also be negative.

Let’s imagine that a citizen deposits his money in a bank and this entity does not pay him any interest for that, even so, the citizen is the one who has to pay a fee to deposit his money. This simple example illustrates the concept of a negative interest rate, a circumstance that is beginning to occur in some countries to discourage the use of savings and promote investment and consumption.

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