Interest Rate is one of the fundamental attributes of the credit and expresses the increase in the loan amount for a specified period as a percentage. Interest rate may apply to different periods of time, but mostly yearly is given. When lending it is possible to determine the fixed rate (e.g. bills).
The interest rate is affected by several factors:
- Net interest rate resulting from human preferences of current consumption before later consumption
- Risk premium - the higher the risk of default, the more the lender will require from the borrower to compensate
- Inflation, more precisely inflation expectations - anytime a lender assumes that the purchasing power of money falls to some extent in the period under consideration, it will ask a higher amount from the debtor to replace this loss
- Foreign exchange risk - in the case of granting credit to a foreign entity
- Interest rate at which the central bank lends to commercial banking institutions
The interest rate does not include other charges related to the loan.
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