Interest Rates and Loans

Interest Rate Basics

When you are applying for a loan, one of the key aspects is the interest rate. Simply put, an interest rate on a loan or mortgage is the price you must pay to borrow money. In general, it is a percentage expressed over the span of a year commonly used as a way to gauge other variables, such as inflation and unemployment. When the lender lends his money out in loans, he isn’t spending that amount of money on consumer items. This is known as deferred consumption.

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A Rule of Thumb

According to the time preference theory, it is generally assumed that people prefer having goods now as opposed to later, making the interest rate positive in a free market.

Inflation

Inflation is present in most economies. If inflation is positive, a certain amount of money will buy fewer goods next year than it can this year. Therefore, the borrower must compensate for this by paying the lender interest and other assorted fees.

Investments

The lender must consider all of his investment options. If he decides to lend to one borrower and not another, he forgoes the financial returns he would’ve earned if his decision had been different. Also, the lender must be aware of the risks involved in his investment choices. For instance, the borrower could go bankrupt, and the lender would be out that money. This is why most lenders charge a risk premium so that he is unable to lose money.

A Few Definitions

Nominal interest rate - the amount of interest payable expressed in terms of money

Real interest rate - an adjusted nominal interest rate taking account of inflation; measures purchasing power

Bad Credit Loan Interest Rates

People like to have their resources readily available so that they can be easily exchanged for goods. With a hard money loan, you will have fast and easy access to the cash you need. In general, interest rates for those with poor credit are a higher because more risk is involved, but there is always someone willing take that risk. It is important that proper research is conducted in order to find the best option. One of the most convenient places to search for a hard money lender is on the web.