The core idea
Interest is the price of using someone else’s money. Borrowers pay; lenders (or investors) receive. The rate expresses that price per unit of time—usually a year in consumer finance—before adjustments for compounding and fees.
Why rates differ
- Longer terms and riskier borrowers typically face higher rates.
- Collateral can lower rates because it reduces lender loss severity.
- Inflation expectations and central bank policy influence baseline rates across products.
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FAQ
- Is interest “profit” for banks?
Partly—it must also cover defaults, operations, and the time value of money. Your rate reflects that bundle, not a moral judgment.