what is the purpose of an interest rate?
In: Economics
A burger today is $12. A burger in 2030 will be $15. If I give you $12 today, do I want to only receive $12 in the future? No.
Interest rates account for 2 things. First, I’m giving you $12, I want to get something out of it. I also want my $12 to cover inflation (see burger above) over that time.
Depending on the use, there may be other items included. People with low credit scores are charged higher interest rates. There’s a risk they won’t repay entirely, and they pay more for a loan company to accept that risk.
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