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Interest Rate: A Beginner's Guide (Part 1)

INTEREST RATE

Have you ever wondered why the media and people talk so much  about the term, ‘Interest  Rate’?  Actually, it is because Interest rate is like the “thermostat” of the economy – It can cool down or heat up economic activity.  So, interest rate is the dominant rate that affect money, investment and the economy.

Also bear in mind, that often times, you will hear people say ‘the rate’ instead of ‘interest rate’. The rate and interest rate can be used interchangeably as they both mean the same thing .

According to ChatGPT, interest rate as explained to a 5-Year old child is like a small “thank you” you give when you borrow someone’s money, or  a small “gift” you receive when you let someone keep your money.

Example:

You borrow 10 candies from your friend and promise to give back 10 candies plus 1 extra  candy later. The 1 extra candy is like the interest.

The rule that says how much extra you give is the interest rate. 

Drifting into a more technical definition of Interest Rate, it means the percentage cost of borrowing money or the percentage return earned on money over a specific period of time. 

In finance terms:

Interest rate is the price of money expressed per  time period (usually per year) .

Interest rate is used to measure how much extra is paid or earned relative to the principal (original amount borrowed).

Ejiro A. Ovbiye

Director of Schools